Is Family Caregiver Income Taxable?

Family caregiver income is the money you get paid for taking care of a family member who is elderly, has a disability, or has special needs. If this is how you earn your pay, you might wonder, “Is family caregiver income taxable?” 

In most cases, the answer is yes, but there are exceptions and nuances to consider. How taxes affect you depends on whether you’re officially employed, where the money comes from, and the specific tax rules for family caregivers. But don’t worry ― it won’t necessarily affect your qualifications for Medicaid.

If you’re a family caregiver, it’s really important to understand how taxes work for this kind of income so you can keep your finances in order and avoid any surprises. This article explains what you need to know about the tax rules for family caregiver income.

Taxability of Family Caregiver Income

General Rules on Taxable Income

The Internal Revenue Service (IRS) considers pretty much all income taxable unless there’s a specific exemption by law. In other words, the money you receive for caregiving is subject to income tax, at least in most cases.

But what exactly is “income”? According to the IRS, it’s any money, property, or services you receive that can help cover your basic needs or maintain your lifestyle. This means your caregiving wages count as income, too.

Specific Considerations for Family Caregivers

Here are the different ways you might get paid as a family caregiver and whether the income is taxable:

• Medicaid Waiver Payments: These are payments you receive to care for a loved one at home rather than in a nursing home. In many cases, these payments aren’t taxable.
• Payments from Family Members: If your family member pays you directly for your care, this is usually taxable income. However, the exact tax situation can vary depending on whether you’re considered an employee or not.
• State-Funded Programs: Some states have programs that provide payments to support family caregivers. Whether these payments are taxable depends on the specific program. In many cases, these payments are considered taxable income, but there may be exceptions, so it’s important to check the details for your state.

Conditions Under Which Payments Are Taxable

You’ll generally need to pay taxes on your caregiving income if:

• You’re considered an employee of the person you’re caring for. In this case, you’ll report the income on your tax return.
• You’re working as an independent contractor. Here, you’ll need to report the income and may also need to pay self-employment taxes.
• The payments are above certain amounts or don’t fit into specific exemption categories, such as the Medicaid waiver payments.

Exceptions and Exclusions

Your caregiver income might not be taxable in some situations. Here’s a breakdown of the exceptions and exclusions you should know about.

IRS Notice 2014-7

In 2014, the IRS released Notice 2014-7, which is pretty important for caregivers. This notice deals with payments made under state Medicaid Home and Community-Based Services (HCBS) waiver programs. Basically, the notice clarifies that some of these payments can be excluded from your taxable income.

How does this affect you as a family caregiver? It means if you provide care for someone with physical, mental, or emotional disabilities in your home, and you’re getting paid through a Medicaid waiver program, you might be able to exclude these payments from your taxable income.

Other Potential Exclusions

Here are other ways you might catch a tax break:

• Reimbursements for Expenses: If you spend money on medical supplies, transportation, or other caregiving necessities, and you get reimbursed for these costs, that money usually isn’t considered taxable income.
• Non-Cash Benefits: Sometimes, caregiving arrangements include things like food, housing, or transportation assistance provided directly to the caregiver. The value of these non-cash benefits might not count as taxable income as long as they are directly related to the caregiving services you provide. It’s a bit of a gray area, though, so it’s usually a good idea to check with a tax professional to be sure.

Reporting and Documentation

Proper reporting and documentation are important when it comes to managing your caregiver income. Here's what you should know about keeping everything in order and avoiding unpleasant surprises:

Requirements for Taxable Income

If you receive taxable income as a family caregiver, you’ll need to report it on your tax return. You’ll typically include the income on Form 1040, and you may need to attach additional forms depending on your specific situation. For example:

• W-2 Forms: If you’re considered an employee, you’ll get a W-2 form from your employer detailing your wages and taxes withheld. You’ll report this income on your Form 1040.
• 1099 Forms: If you’re an independent contractor, you’ll likely receive a 1099-NEC form showing your earnings. You’ll report this income on your Schedule C.

Necessary Documentation

Keeping good records of your caregiver income and related expenses is super important because it helps you report it properly and back up any claims for exclusions or deductions. Here are important documents you should keep:

• Payment Records: Keep copies of all payments you receive from Medicaid waiver programs, state-funded programs, or family members, including checks, direct deposit records, and other proof of payment.
• Receipts and Invoices: If you’re reimbursed for expenses, keep all receipts and invoices.
• Contracts and Agreements: Maintain copies of any contracts or agreements related to your caregiving work.
• Tax Forms: Save all W-2, 1099-NEC, and other tax forms you receive.
• Benefit Documentation: Keep records of any non-cash benefits you receive, including details on the type and value of the benefits.

Implications of Non-Compliance

Not reporting your caregiver income properly can have serious consequences. You could face penalties for not filing your tax return on time and might have to pay interest on any unpaid taxes. If the IRS finds that you underreported your income, you could get hit with more penalties.

Non-compliance can also raise your chances of getting audited. During an audit, the IRS will go through your financial records to make sure everything is correct, which can be stressful and take a lot of time.

Impact on Medicaid Eligibility

It’s normal to wonder how your caregiver income could impact Medicaid eligibility ― both for yourself and your loved one. Qualifying for Medicaid is usually based on income and asset limits.

• Income Limits: Generally, to qualify for Medicaid, your income must be below a certain percentage of the federal poverty level (FPL). Each state has its income thresholds for Medicaid eligibility, but your income needs to be pretty low to qualify.
• Asset Limits: Medicaid also looks at what you own. In most cases, you can only qualify if you have limited assets, such as savings or property. The exact asset limits can vary by state and by the type of Medicaid program.

How Taxable Income Is Considered

Countable vs Non-Countable Income

Medicaid treats some income as countable, meaning it affects your eligibility, and other income as non-countable, meaning it doesn’t affect your eligibility. For example, certain Medicaid waiver payments to family caregivers might not count as income. On the other hand, wages, salaries, and other benefits are countable income and are considered when determining if you qualify for Medicaid.

Family Caregiver Payments

Usually, payments from Medicaid waiver programs, like those mentioned in IRS Notice 2014-7, are not counted as income. This means they don’t affect your Medicaid eligibility. However, the payments you get directly from family members or state-funded programs might count as income. To follow Medicaid eligibility requirements correctly, it’s important to know your state’s rules.

Conclusion

To wrap up, knowing how your caregiver income is taxed, including any exemptions, is really important. Keeping good records and talking to a tax expert can help you understand these rules and follow Medicaid guidelines. If you need help with this, don’t hesitate to contact Abby Care today — we’re here to assist you.

‍Sources

https://www.specialneedsalliance.org/the-voice/the-pitfalls-of-caregiver-employment-paying-withholding-and-reporting-requirements-2/

https://www.irs.gov/newsroom/tax-situations-when-taking-care-of-a-family-member

https://www.irs.gov/businesses/small-businesses-self-employed/family-caregivers-and-self-employment-tax

https://www.aarp.org/caregiving/financial-legal/info-2017/tax-tips-family-caregivers.html

https://www.rocketlawyer.com/family-and-personal/personal-finance/personal-taxes/legal-guide/who-pays-the-taxes-for-in-home-caregivers-and-workers