Wages paid to a grandparent for in-home childcare escape Social Security and Medicare taxes, and every dollar qualifies as Roth IRA earned income.
The exemption vanishes for single, divorced, or widowed parents with children under 18, trapping the families who rely on grandparent care most.
Paying grandma on the books unlocks the federal child and dependent care tax credit, which can exceed the payroll-tax savings entirely.
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If you pay a grandparent to watch your kids, the tax code hands you a deal most families never claim. Wages you pay your own mother or father for in-home child care are generally exempt from Social Security and Medicare tax, and every dollar she earns counts as taxable compensation she can funnel into a Roth IRA. The entire loophole sits inside the Internal Revenue Service's Publication 926, the Household Employer's Tax Guide.