If you’re a family caregiver, you may have wondered if any income you earn from caregiving is taxable. According to the IRS, it generally is, notes Ross Loehr, a certified financial planner at The Sovereign Investor in Atlantic Beach, Florida. “However,” he adds “it largely depends on the circumstances and source of the income.”
Do family caregivers have to pay taxes? And is there a family caregiver tax exemption? Expert answers to these questions and more below.
Is family caregiver income taxable?
Generally, yes, family caregiver income is taxable. “If you are employed by the person you are giving care to then you will have to report this income on your tax return,” notes Loehr, who adds: “This also applies if you are an independent contractor, in which case you may also have to pay self-employment taxes.”
For folks who are considered independent contractors — meaning, they’re not officially employed by the person for whom they’re caring — there are a number of nuances. For instance, if a person receives Medicaid money to care for their spouse after an injury, but they’re not a trained nurse or physical therapist, etc., they don’t have to pay self-employment tax.
To find out about the different scenarios and exceptions, see the IRS’s page on family caregivers and self-employment taxes.
“If you are employed by the person you are giving care to then you will have to report this income on your tax return.”
— Ross Loehr, certified financial planner
General rules for taxing family caregiver income
Here are a few general rules to keep in mind when it comes to taxable caregiving income:
Direct payments are taxable. “If a family member pays you directly for caregiving services, the payments are generally considered taxable income,” notes Loehr. “In this case, you are responsible for reporting this income on your tax return.”
State-funded programs may be tax exempt. “If you’re receiving payments from a state-funded program there are instances where this income may be tax exempt,” notes Leohr. “The rules vary depending on the specific program, so be sure to check the details in your individual state.”
Are there family caregiver tax exemptions?
If you’re a caregiver who’s receiving payments from a Medicaid waiver program and you and the person for whom you’re caring live in the same house, payments “may be excluded from taxable income, notes Loehr.
To find out about tax exemptions as they relate to Medicaid payments for caregiving, see the IRS’s page on Medicaid waiver payments.
“If a family member or program reimburses you for caregiving-related expenses,” he adds, “these reimbursements are not usually considered taxable income, provided they directly cover the costs incurred.”
How to document family caregiver income
If you are an employee, you will receive a W-2 form from your employer which you then report on your Form 1040, explains Loehr. “However, if you are an independent contractor, you will receive a 1099-NEC form which you report on your Schedule C.”
“For documentation, you should maintain accurate records of all income and expenses related to caregiving,” notes Loehr. “This includes any payment records you receive from Medicaid waiver programs, state-funded programs or family members and receipts for any reimbursed expenses.”
“For documentation, you should maintain accurate records of all income and expenses related to caregiving.”
— Ross Loehr
Does family caregiver pay impact eligibility for Medicaid and other programs?
Medicaid eligibility is based on income and assets. “If you receive pay as a family caregiver, it might count as income, potentially pushing you over Medicaid’s income threshold,” explains Loehr.
“However,” he adds, “some caregiver payments, like those received under Medicaid HCBS waiver programs and excluded under IRS Notice 2014-7, might not count as income for Medicaid eligibility purposes.”
Ultimately, rules vary by state, so it’s essential to check with your state’s Medicaid office.
What happens if you don’t pay taxes on family caregiver income?
The short answer: Nothing good. Failing to report caregiver income, as the case is with any other form of income, is tax evasion.
“Failure to pay taxes on family caregiver income will mean you have to pay penalties, including any interest on unpaid taxes,” notes Loehr. “In some cases, you may even get audited by the IRS, which can take a lot of time and cause a lot of stress.”
The bottom line
Family caregiver earnings are taxable, but as with most financial questions, each situation is unique, and there may be exceptions.
When it comes to figuring out if your earnings as a family caregiver are taxable, there are a few things to consider — including whether you’re an employee or independent contractor. And, as Leohr notes, even within those general guidelines there’s room for nuance. Checking with the IRS or your state tax office for complete guidelines is best.
