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I've been looking and cannot find this situation, however I know it must exist.
My Mother who has dementia has moved from Assisted Living where she was unhappy to my brother's home. He has his own small struggling home improvement business. His wife would help him paint, etc for customers, but now she is full-time caregiver to my mother. As the POA for my mother, I pay her $2000 per month thru my Mom's savings account. Here are some facts:
The home belongs to my Brother and his wife, not my Mother.
They do not pay for my Mothers prescriptions or medical expenses of any kind.
They do not provide clothing or diapers (depends) for my Mother.
They do provide meals, laundry, medication dispensing, a home environment, etc.
As POA, I will need to provide a 1099 to my sister-in-law at the end of the year.

Now for my questions:
What kind of 1099, a 1099 MISC or something else?
Do they need to pay self employment taxes on this money?
What kind of deductions can they take to cut this tax burden?

I assure you that they are not making any or much money for the amount of work and time that is required to care for my Mom.

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A 1099 is for independent contractors. So if your brother hired a carpenter to finish out a door on a project, your brother would issue a 1099 MISC to the carpenter.
The IRS has guidelines on determining independent status.

Household, nanny or home health workers aren't considered independent contractors for IRS. They are viewed as an employee. It does not matter how many hours they work or how much you pay them. Your SIL will need to do a W-2 every year for wage and tax reporting, and mom must make payments to the IRS for Social Security and Medicare taxes, as well as the Federal Unemployment Tax (FUTA). The cut off for 1099 for household is $ 1,799.00 so for $1800 or more paid (2012) has to be done as an employee with payroll taxes.

IRS publication 926 has info on household employers tax.
This is why so many hire through an agency as they take care of all that

Quicken or Quick Books have easy programs to do this & also you can track all the other spending on/by mom. Most excellent if you later on need Medicaid and they question where funds went. Also H & R Block has a separate division that does only small business services and can do this for you and then deal with doing the taxes too. Block's are free-standing open year round offices and many of the workers are former IRS or treasury agents, it's not the take your taxes to places that pop up in tax season.

Yeah it is a PIA but for SIL, this does build up her SS credits for her future and then provide for real time income for her & your brother. I would suggest that you & mom & SIL go and meet with an elder law attorney do draw up a "personal service contract" and then update all of mom's legal while you are there. Mom pays for this. This will be very important if in the future mom needs to apply to Medicaid for a NH. You don't want any of these payments to SIL being viewed as a transfer penalty by Medicaid 4 years from now. Good luck.
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