Income Requirements

Even though you are only watching your own family member, if you are given money in exchange for that service you are considered a self-employed individual. If during the course of a year of caring for your grandchild you are paid $400 or more, you must report the income on your taxes as self-employment income. For your own benefit, keep a record of the amount you are paid each time you watch your grandchild. A small notebook or a simple spreadsheet on the computer will suffice. Mark down the date you are paid, the amount and whether it was cash or a check. This will make reporting your income at the end of the year much easier.

Allowable Expenses

The good news is that even though you must report your income to the Internal Revenue Service for babysitting, you can lower the amount of that income that is taxable by taking a deduction for your babysitting-related expenses. If you drive your grandchild to and from school, to after-school activities or to other appointments, report your mileage to lower your taxable income. In addition, the money you spend on food for your grandchild is an allowable expense. If you buy items for your home specifically because you are watching your grandchild, such as a bed, extra clothing or childproofing equipment, these expenditures can be deducted as business expenses.

Filing Self-Employment Taxes

As a self-employed babysitter, report your income on either a Schedule C or C-EZ. There is a chart on Schedule C-EZ to help you determine which to choose. List your income and expenses to calculate your net earnings for babysitting your grandchild. After finding your earnings, report them on your Form 1040 and also on Schedule SE. Schedule SE will help you determine how much you owe in self-employment taxes. If you have any questions or doubts about filing your own taxes when you have babysitting income, talk to a tax professional.

Child and Dependent Care Tax Credit

The upside to reporting your babysitting income for watching your grandchild is that your child can report the amount paid to you to the IRS for a tax credit. The credit is called the Child and Dependent Care Tax Credit. By giving the IRS your name and Social Security number, your child can reap a tax benefit for paying you to watch your grandchild. The catch is that you must be babysitting so that your child can go to work or school. Your child should use Form 2441 - Child and Dependent Care Expenses.