My wife babysits our granddaughter in our home and is paid to do so, making her a self-employed independent contractor. She drives to pick up our granddaughter each morning and transports her to our house to watch for the day. Is this to-and-from mileage to our granddaughter's house deductible as a job-related expense?
-Brent
Dear Brent,
Ahh, the wild and woolly adventures of babysitting. To be a good babysitter, you have to be as cunning as a fox, have the reflexes of a cat, and deduce a crime scene faster than Sherlock Holmes. Because no matter how talented Fido is, he didn’t paint the nails on his paws by himself. Performing services as a babysitter is no relaxing stroll through the Cleveland Botanical Garden, and you want to get the most bang for your hard-earned buck. Before delving into the deductibility of transportation expenses when providing babysitting services, let’s go through some basic tax information regarding babysitting activities.
As your wife knows, babysitting little rascals can get complicated fast. In the same respect, the tax rules surrounding babysitters can be fraught with complexities, primarily when the caregiver provides “Kith and Kin” childcare. Generally, a “Kith and Kin” care provider does not have another job and watches over their child and maybe a niece or nephew or possibly their neighbor’s child. The care provider is generally offering their services for free or for some minimal extra pocket money.
Before discussing whether certain expenses are deductible, we need to take a moment and review what a bona fide business is. Generally, for an activity to be considered a “business,” there must be a profit motive. Is the babysitter charging the current fair market rate for their services? Often, when the caregiver and child receiving the care are related, the babysitter is not paid the current going rate. If the care provider is being paid far less for their services than the current fair market rate, the IRS may determine the activity is not a bona fide business and determine it is a “hobby” for tax purposes. When an activity is determined to be a hobby, the gross income received (income received before any expenses) is reported as “other income” on the taxpayer’s individual income tax return, Form 1040. For 2020, other income is reported on Schedule 1, Additional Income and Adjustments to Income, line 8. Expenses associated with hobby income are claimed as an itemized deduction subject to 2.5 % of the taxpayer’s adjusted gross income (AGI). A taxpayer may only claim hobby expenses up to the amount of the gross income reported for the activity. Because of the Tax Cut and Jobs Act of 2017 (TCJA), itemized deductions subject to the 2.5% AGI limitation have been suspended for tax years 2018 through 2025. This means for those tax years, only the gross income from a hobby activity is reported and none of the expenses are deductible.
Basically, in a “Kith and Kin” childcare arrangement where the services are provided for in the caregiver’s home, the income and expenses are reported on Schedule C, Profit and Loss From Business, provided there is a bona fide profit motive. Any net income (reported gross income minus any qualified expenses) is subject to self-employment tax. If your wife is taking care of your granddaughter for a nominal fee that is not even covering expenses, chances are her activity will not be considered a business by the IRS. Any transportation or other expenses your wife incurred in connection with babysitting your granddaughter would not be currently deductible.
Generally, expenses associated with a business activity must be ordinary and necessary to be deductible. For example, although the cost of spending the afternoon at a day spa might be necessary for a babysitter to maintain their tranquility, it is not considered an ordinary and necessary expense to run a babysitting activity. When it comes to babysitting family members, knowing which expenses are deductible can get tricky as the line between personal and business can become blurred rather quickly. For example, food purchased to be used exclusively for the child’s snacks and meals while in the provider’s care would be deductible in full. However, if your wife made cookies for a weekend family gathering and then fed the same cookies to your granddaughter on Monday while babysitting, the cost to make the cookies would not be deductible. This does not mean that expenses that are part business and part personal are automatically nondeductible. It will depend on the facts and circumstances surrounding the deduction.
Now that the foundation is laid let’s discuss transportation expenses. For transportation costs to be deductible, the primary purpose of the trip must be for business. You said your wife picks up your granddaughter from her parent’s home and drives the granddaughter back to the home you and your wife share. Your wife then takes care of your granddaughter at your house. Generally, this would be considered an allowable transportation deduction because the expense is directly related to the childcare given. However, say your granddaughter’s parents cannot take their daughter to her dance lesson on Saturday morning and ask Grandma if she would give their daughter a ride. There were no plans for Grandma to babysit the granddaughter on Saturday. Driving the granddaughter to her dance lesson would be considered a personal expense as it is not directly related to babysitting the granddaughter. The transportation must be directly related to the time when the paid childcare is being given to be deductible.
Here is another scenario that can occur regarding transportation expenses. A daughter asks her mother if she would take care of her three-year-old child every Monday, Wednesday, and Friday from 7:00 AM until 5:00 PM. The babysitting would be done at Grandma’s house, and the daughter is paying the mother the current babysitting rate in their community. As part of her services, Grandma provides the grandchild transportation to her house. Generally, the daughter does not work on Tuesdays and Thursdays, but her boss asked if she would work these days next week. Knowing that her daughter is strapped for cash, Grandma does not accept any income for taking care of the grandchild on those two days. Any expenses Grandma incurs on Tuesday and Thursday, including providing transportation for the child, would not be deductible, even though the expenses would typically be deductible. The expenses would be considered personal.
It is essential for your wife to maintain transportation logs with the date, time, business purpose, who was in the car, the starting point and final destination, and total miles are driven for the trip, plus total miles driven for the entire year (both business and personal). Knowing when an expense is deductible is one of the cornerstones to preparing an accurate return. In turn, keeping good records can make or break the validity of business expenses.
When the childcare provider and child in their care are related, the IRS may scrutinize the activity to determine if it is a bona fide business or a hobby. Having a signed and dated babysitting agreement that lists the terms of the arrangement may help to validate that the activity is a business. Moreover, keeping a current calendar or log of the days and times when the babysitting services were rendered is also beneficial. Receiving trackable payments such as check, Zelle, Venmo, or Google Pay, supports that there is a bona fide business and payments are being made for services rendered. Being consistent and current with the books and records of an activity, no matter how small the endeavor may be, is a big step towards tax return success.
Wishing your wife marvelous adventures in babysitting and both of you many happy returns,
Jean