Navigating the complexities of tax regulations can be particularly challenging when it comes to understanding income from caregiving services. A common area of confusion arises around payments received for providing care under state Medicaid Home and Community-Based Services (HCBS) waiver programs, especially concerning how these payments are treated for federal income tax purposes. This article delves into the key aspects of these payments, drawing from IRS Notice 2014-7, to clarify whether these funds are considered taxable income and what programs are in place to support foster care and similar care services through Medicaid waivers.
The Internal Revenue Service (IRS) issued Notice 2014-7 to provide guidance on the federal income tax treatment of specific payments made to individual care providers. These payments are for the care of eligible individuals under state Medicaid Home and Community-Based Services waiver programs, as described in section 1915(c) of the Social Security Act. These waiver programs are designed to allow individuals who would otherwise need care in institutional settings like hospitals or nursing facilities to receive care in a more home-like environment, often within the care provider’s residence.
Notice 2014-7 essentially states that the IRS will treat these Medicaid waiver payments as “difficulty of care payments.” This classification is crucial because, under Section 131 of the Internal Revenue Code, difficulty of care payments can be excluded from an individual’s gross income for federal income tax purposes. This exclusion is a significant benefit for many caregivers, but it’s important to understand the specifics and limitations outlined by the IRS.
To further clarify the application of Notice 2014-7, the IRS has addressed several frequently asked questions from both individual care providers and agencies involved in Medicaid waiver programs. These questions and answers provide practical guidance on various scenarios and ensure that both caregivers and payers understand their responsibilities regarding these payments.
Key Questions for Individual Care Providers Regarding Medicaid Waiver Payments
Q1. Income Exclusion Beyond Medicaid Home and Community-Based Services Waiver Programs?
Question: I receive payments from a state Medicaid program, but it’s not specifically a Medicaid Home and Community-Based Services waiver program. These payments are for the personal care of my adult disabled son in our home. Can I exclude these payments from my gross income?
Answer: The tax treatment of payments received under state programs that are not Medicaid Home and Community-Based Services waiver programs depends heavily on the specifics of the program itself. The IRS will evaluate the nature of the payments, along with the program’s purpose and structure, to determine if they can be treated as difficulty of care payments and thus be excluded from gross income. Each program will be assessed on its own merits to determine eligibility for this tax exclusion.
Q2. “Provider’s Home” Definition: Caring for a Parent in Their Home?
Question: I moved into my elderly mother’s home to provide her care. I don’t maintain a separate residence elsewhere. I receive Medicaid Home and Community-Based Services waiver payments for the personal and supportive home care I provide to her. Am I considered to be providing care in “the provider’s home” as described in Notice 2014-7?
Answer: Yes, in this scenario, you are considered to be providing care in “the provider’s home.” According to Section 131 and clarified in cases like Stromme v. Commissioner, “the provider’s home” is defined as the place where the care provider lives and conducts their daily life routines, such as sharing meals and celebrating holidays with family. In your situation, your mother’s home has become your home because it serves as your primary residence where you carry out your personal life. Therefore, payments received for care in this setting qualify for exclusion.
Q3. Separate Home Maintained: Impact on Payment Exclusion?
Question: I care for an unrelated elderly person five days a week in her home. I have a room in her home where I sleep four nights a week. I receive Medicaid waiver payments for this care. However, on weekends and holidays, I return to my separate home where my family resides. Can I exclude these payments from my gross income?
Answer: No, in this case, you cannot exclude the Medicaid waiver payments from your gross income. Even though you provide care in the care recipient’s home and stay there during the week, you maintain a separate home where you primarily reside and carry out your private life routines with your family on weekends and holidays. Because you have a distinct “provider’s home” elsewhere, the care is not considered to be provided in your home for the purposes of Notice 2014-7.
Q4. Care Recipient’s Home as Sole Residence: Eligibility for Exclusion?
Question: I provide care seven days a week for an unrelated elderly person in her home, which is also where I live full-time. I do not have another home. I receive Medicaid waiver payments for this care. Am I eligible to exclude these payments from gross income?
Answer: Yes, you are eligible to exclude these payments. In this situation, the care recipient’s home serves as your primary and only residence. Since you do not have a separate home and the care is provided within this shared living space, the Medicaid waiver payments are excludable from your gross income. The critical factor is that the care is provided in what is considered your home.
Q5. Multiple Care Providers in the Same Home: Can Both Exclude Payments?
Question: I am a parent of a disabled child and receive Medicaid Home and Community-Based waiver payments that are excludable from gross income. My sister also lives with us and receives separate Medicaid waiver payments for providing care to my child. Can my sister also exclude her payments from gross income?
Answer: Yes, your sister can also exclude her Medicaid waiver payments from gross income. Notice 2014-7 allows for more than one care provider living in the same home as the care recipient to exclude Medicaid waiver payments. As long as both you and your sister meet the requirements of providing care in the home where you both reside with the care recipient under a Medicaid waiver program, both of you can exclude your respective payments.
Q6. Respite Care Payments: Are They Excludable?
Question: I am a respite care provider offering personal care and support services to disabled individuals either in their homes or in my home when the care recipient does not live there permanently. I receive payments under a state Medicaid Home and Community-Based Services waiver program for this respite care. Can I exclude these payments from my gross income?
Answer: No, respite care payments are generally not excludable under Notice 2014-7. The exclusion specifically applies to payments for care provided in the individual care provider’s home, and crucially, it must be the home where the care recipient also lives under their plan of care. Respite care, by its nature, is often temporary and may not occur in the permanent shared home of the provider and recipient, thus not meeting the criteria for exclusion.
Q7. Cost-Sharing Provisions in Medicaid Waiver Programs: Impact on Exclusion?
Question: I receive Medicaid Home and Community-Based Services waiver payments for caring for a disabled individual who lives with me. The program has a cost-sharing provision where the care recipient may need to pay a portion of the total payment back to the program administrator. Can I still exclude the entire payment I receive from gross income?
Answer: Yes, you can exclude the entire payment you receive from the Medicaid waiver program, even if the care recipient is required to pay back a portion of the cost to the program administrator. The exclusion is based on the gross payment you receive from the Medicaid waiver program. However, it’s important to note that this exclusion does not extend to direct payments made privately by a care recipient from their own funds to cover part or all of their care costs. Private payments do not qualify for this exclusion.
Q8. Vacation Pay and Medicaid Waiver Payments: Are Both Excludable?
Question: Besides Medicaid waiver payments for the direct care I provide to a disabled individual in my home, I also receive vacation pay from the state. Can I exclude this vacation pay from my gross income as well?
Answer: No, vacation pay is not excludable from gross income under Notice 2014-7. The exclusion is specifically limited to payments made directly for the care of the disabled individual. Vacation pay, while related to your role as a caregiver, is considered a separate benefit and does not fall under the category of difficulty of care payments as defined by Section 131 and Notice 2014-7. Only payments directly intended for the care itself are eligible for exclusion.
Q9. Electing to Include Excludable Payments for Earned Income Credits?
Question: I received payments described in Notice 2014-7 which are treated as difficulty of care payments. Can I choose to include these payments in my earned income for the purposes of the Earned Income Credit (EIC) or the Additional Child Tax Credit (ACTC)?
Answer: Yes, for open tax years, you have the option to include all (but not just a portion) of these Medicaid waiver payments in your earned income calculation for the EIC or ACTC, provided these payments otherwise qualify as earned income (either as wages or self-employment income). This election can potentially benefit taxpayers who might qualify for these credits or increase the amount they can receive.
Q10. Amended Returns for Prior Years to Claim Exclusion?
Question: If I received payments described in Notice 2014-7 in a previous year and reported them as income, can I file an amended return to exclude these payments from my gross income?
Answer: Yes, you can file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim a refund for overpaid taxes if you received payments eligible for exclusion under Notice 2014-7 in a prior year. However, this is subject to the statute of limitations, which generally requires that you file within three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. To expedite processing, you should include documentation such as:
- The full name and, if available, the Social Security number or Taxpayer Identification Number of the care recipient.
- Copies of documents proving that you and the care recipient lived in the same home during the year in question (e.g., driver’s license, government-issued ID, social agency documents, bank statements, medical bills, or utility bills).
- Evidence that the care recipient was receiving care under a state Medicaid waiver program.
Q11. Reporting Excludable Wage Payments on Form W-2?
Question: I received wage payments that are excludable under Notice 2014-7. However, the agency paying me treated me as an employee, withheld federal income tax, and reported these payments as wages in box 1 of Form W-2. How do I report this to the IRS to ensure the payments are treated as excludable?
Answer: You should report the full amount of wages as stated in box 1 of Form W-2 on line 1 of Form 1040 or Form 1040-SR. To account for the excludable portion, you will then subtract this amount as “Other income” on Schedule 1, line 8 of Form 1040 or Form 1040-SR. If you have other income to report on Schedule 1, line 8, you will net the excludable amount against it. In cases where the excludable amount exceeds your other income on line 8, you may need to enter a negative amount. Crucially, write “Notice 2014-7” on the dotted line of Schedule 1, line 8, for paper returns or enter it directly for electronic filings to clearly indicate the reason for the adjustment.
Q12. Social Security and Medicare Taxes (FICA) on Excludable Payments?
Question: Are payments that are excludable from gross income under Notice 2014-7 also exempt from Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA)?
Answer: Not necessarily. Whether these payments are subject to Social Security and Medicare taxes depends on your employment status – whether you are considered an employee of an agency, an employee of the care recipient, or an independent contractor.
- Agency Employee: If the agency paying you is your employer, the payments are subject to Social Security and Medicare taxes.
- Care Recipient Employee: If the care recipient is your employer, these payments are considered wages and are subject to Social Security and Medicare taxes unless specific exceptions for domestic services apply (e.g., services performed for a spouse, child, or by a child under age 21 for a parent, or if the wages fall below a certain annual threshold).
- Independent Contractor: If you are classified as an independent contractor, the payments are not subject to Social Security and Medicare taxes.
Your employment status is determined by who has the right to direct and control how you perform your services. If you believe you have been incorrectly classified, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS to get an official determination.
If you believe Social Security and Medicare taxes were wrongly withheld, first contact the agency that withheld the taxes for a refund. If they do not take action, you can file Form 843, Claim for Refund and Request for Abatement, to claim a refund of erroneously withheld amounts.
Q13. Reporting Excludable Payments as Non-Employee Compensation (Form 1099-NEC/MISC)?
Question: I provide services under a Medicaid Home and Community-Based Services waiver program, and the paying agency does not treat me as an employee. I don’t have a separate business for these services. However, I received Form 1099-MISC or Form 1099-NEC reporting these payments as income. How should I report this to the IRS to reflect that these payments are excludable?
Answer: Report the Medicaid Waiver Payments listed on Form 1099-MISC or Form 1099-NEC on Line 1d of Form 1040. Then, on Schedule 1, Line 8s, enter these payments as nontaxable Medicaid Waiver Payments. Because these payments are excludable from income and you are not operating a trade or business through these services, the Medicaid Waiver payments are not considered self-employment income and are not subject to self-employment tax.
Q14. Excludable Payments for Sole Proprietors Providing Home Care Services?
Question: I operate a business as a sole proprietor providing home care services. Within this business, I received payments that are excludable under Notice 2014-7. However, I received Form 1099-MISC or Form 1099-NEC reporting these payments as income. How do I report this to the IRS to show these payments are excludable from gross income?
Answer: Include the total amount reported on Form 1099-MISC or Form 1099-NEC as income on line 1 of Form 1040 (Schedule C). Then, in Part V, “Other Expenses,” of Schedule C, report the excludable amount as an expense, clearly noting “Notice 2014-7” next to it. Even though you are a sole proprietor, because these amounts are nontaxable and excludable from income, they are not considered self-employment income and are not subject to self-employment tax.
Agency Responsibilities Regarding Medicaid Waiver Payments
Q15. Information Agencies Should Request from Care Providers?
Question: As an agency certified as a Medicaid provider, we make payments under a state Medicaid Home and Community-Based Services waiver program. What information should we request from individual care providers to verify that their payments are excludable under Notice 2014-7?
Answer: If your agency lacks independent confirmation that payments are excludable under Notice 2014-7, you can rely on a written statement from the payee, signed under penalty of perjury, unless you know the statement to be false. The statement should affirm the necessary facts to determine if Notice 2014-7 applies. A sample statement could be:
Under penalties of perjury, I declare that I am an individual care provider receiving payments under a state Medicaid Home and Community-Based Services waiver program for care I provide to ___________________ who lives in my home under the care recipient’s plan of care.
Signed: ________________ Date: ________________
Q16. Federal Income Tax Withholding on Excludable Payments?
Question: Our agency employs individuals who provide care under a Medicaid Home and Community-Based Services waiver program. Some of these payments are excludable under Notice 2014-7. Are we required to withhold federal income tax from these excludable payments?
Answer: No, you are not required to withhold federal income tax from payments that are excludable under Notice 2014-7. Similar to verifying exclusion eligibility, if you don’t have independent knowledge, you can rely on a written statement from the employee, signed under penalty of perjury, confirming the applicability of Notice 2014-7, unless you have reason to believe the statement is untrue.
Q17. Completing Form W-2 for Employees Receiving Excludable Payments?
Question: How should we complete Form W-2 for employees who receive payments excludable from income under Notice 2014-7?
Answer: Any amount that is excludable from gross income should not be included in box 1 (“Wages, tips, other compensation”) of the employee’s Form W-2. If the entire amount paid to an employee in a year is excludable, box 1 of Form W-2 should be left blank.
Q18. Social Security and Medicare Tax Withholding (FICA) by Agencies?
Question: If payments to our employees are excludable under Notice 2014-7, are we still required to withhold and pay Social Security and Medicare taxes under FICA on these payments?
Answer: Yes, generally, even if payments to employees are excludable from gross income for federal income tax purposes, they are typically still considered wages for Social Security and Medicare tax purposes. Therefore, agencies are generally required to withhold and pay Social Security and Medicare taxes and report these wages and withheld taxes on the employee’s Form W-2. However, see Q&A 19 for exceptions if the care providers are properly treated as employees of the care recipients.
Q19. FICA Responsibilities When Care Providers Are Employees of Care Recipients?
Question: We pay individual care providers but properly treat them as employees of the care recipients and fulfill employment tax responsibilities on behalf of the care recipient. If these payments are excludable under Notice 2014-7, are we required to withhold and pay Social Security and Medicare taxes?
Answer: It depends. While payments may be excludable from gross income, they are generally still wages for Social Security and Medicare purposes. However, if the care recipient is the employer, domestic service FICA tax rules apply. These rules provide exceptions, such as for services performed for a spouse or child, or by a child under 21 for a parent, which are not subject to Social Security and Medicare taxes. Additionally, if domestic service wages are below a certain annual threshold, they are also exempt. Refer to IRS Publication 926 for detailed information on these exceptions. If taxes were incorrectly withheld due to a misapplication of these exceptions, see the instructions for Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund.
Q20. Information Reporting for Agencies Not Treating Providers as Employees?
Question: Our agency is a certified Medicaid provider and pays care providers but does not treat them as our employees or employees of the care recipients, so payments are generally not subject to Social Security and Medicare taxes. If some payments are excludable under Notice 2014-7, what are our information reporting requirements?
Answer: Generally, if payments to an independent contractor for services are $600 or more in a calendar year, you must file Form 1099-NEC, Nonemployee Compensation. However, if you know that payments to a care provider are excludable under Notice 2014-7, you should not file Form 1099-NEC for these payments. If you lack independent knowledge, you can rely on a written statement from the payee, signed under penalty of perjury, confirming the applicability of Notice 2014-7, unless you have reason to disbelieve it.
Conclusion
Understanding the nuances of Medicaid waiver payments and their tax implications is crucial for both care providers and agencies. IRS Notice 2014-7 provides essential guidance, clarifying that certain payments for in-home care under Medicaid waiver programs are generally excludable from federal gross income as difficulty of care payments. However, eligibility depends on specific conditions, particularly concerning where the care is provided and the relationship between the provider and recipient. It’s vital for individuals and agencies to carefully review these guidelines and, when necessary, seek professional tax advice to ensure compliance and maximize potential tax benefits. Staying informed about these regulations helps ensure that caregivers can continue to provide essential services while correctly navigating their tax obligations.
