<prompt> Human: Im running through Turbo Tax right now and came across Nanny and Household Employee section and wondering if I need to take any action.Last year I paid my sister-in-law close to 8,000 for child care. 5,000 of this came from my DCRA.According to the IRS, You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done.I didnt hire my sister-in-law, she lives with us, and in terms of caring for the kids, I dont tell her how whats to be done or how. Do I need to take any action here?  <response>: Live-in nannies are usually employees, not independent contractors, and the IRS has been cracking down on that sort of thing. For example, you probably wouldnt be happy if a nanny decided to have a stranger take care of the kids instead--while that would be normal for most independent contractors, so long as the service provided is adequate. The factors that go into whether someone is an employee or an independent contractor are complex, but for childcare provided in your own home, lean on the side of employee unless you have a good rationale otherwise.There are special rules for household employees that relieve you from some of the burden of being an employer. You dont have to withhold federal income tax. But if you pay someone over 2000 in a year, you do have to withhold Social Security and Medicare tax. You can pay the employees share yourself instead of deducting it from her paycheck, if you prefer, but then that counts as part of her gross income. If you withhold anything, you have to file Form W-2 and give her a copy. You may have state or local tax obligations as well. This is not that complicated but you do need to invest some effort into setting it up properly.On the positive side, you can use the expenses you pay a household employee for child care to qualify for the child and dependent care credit. And if your sister-in-law correctly reports her wages, she could use this to qualify for the earned income credit. 