Paid To Care For A Family Member? Here’s What the IRS Says About Taxes
Millions of Americans provide care for aging parents, spouses, children and other relatives. In some cases, those caregivers are paid for their time—either directly by the family member or through an insurance company, government program or other source.
What families may not realize is that those payments can have tax consequences.
The IRS recently reminded taxpayers that family caregivers who are paid for their services may have income-reporting requirements, and the tax treatment can depend on whether the caregiver is considered an employee or is providing caregiving services as a business.
When Is a Family Caregiver Considered an Employee?
According to the IRS, someone who performs in-home services for an elderly or disabled individual is generally considered a household employee, with the person receiving the care considered the employer.
That distinction matters because the household employer may have responsibilities involving Social Security, Medicare and other employment taxes.
There are special rules for certain family relationships, however. Employment taxes may not be required in some situations when the caregiver is:
- The employer’s spouse
- A child under age 21
- The employer’s parent, although exceptions can apply
- An employee under age 18 during the year, although exceptions can apply
Importantly, an exemption from certain employment taxes does not necessarily mean the compensation can simply be ignored for tax purposes.
The IRS says the caregiver’s compensation may still need to be reported on Form W-2, depending on the circumstances.
What If the Caregiver Isn’t an Employee?
Not every paid family caregiver is classified as a household employee.
A caregiver who isn’t considered an employee may still need to report the payments as income on Form 1040 or Form 1040-SR.
Whether the caregiver also owes self-employment tax depends on the facts of the situation.
For example, the IRS notes that a person who receives payments from an insurance company to care for a spouse may still have to report that money as income even though self-employment tax may not apply.
Likewise, a family member who receives payments from a state agency for caring for grandchildren may be required to report the income without necessarily being subject to self-employment tax.
When Could Self-Employment Tax Apply?
The situation can change when caregiving is part of an actual trade or business.
For example, someone who operates an adult day-care business and provides paid care to multiple clients—including a family member—is generally operating a caregiving business rather than simply being compensated for helping a relative.
In that situation, the IRS says the caregiver may need to report the income on Schedule C and calculate self-employment tax using Schedule SE.
Don’t Assume Family Payments Aren’t Taxable
Money changing hands between family members can feel informal, especially when one relative is simply helping another. But the tax rules don’t necessarily treat those arrangements informally.
The source of the payments, the relationship between the caregiver and the person receiving care, how the work is performed and whether the caregiver operates a separate business can all affect how the income should be handled.
Families who are paying a relative for caregiving—or caregivers who are receiving payments—should determine the tax treatment before filing rather than assuming the payments don’t need to be reported.
Fast Forward Accounting Solutions can help families and caregivers determine how caregiving payments should be reported and whether household employment or self-employment tax rules apply to their situation.
Source: IRS
