Payments for respite care may be taxable. See below for further details.
The Washington State Agency should have withheld taxes and provided you with an information return if they paid for what was classified as respite care. If the foster parents made the payments, they should have provided an information return (W-2 or 1099).
According to the Washington State Department of Social and Health Services:
Payment for respite care is taxable income; providers will have taxes deducted from their earnings. Respite providers for foster parents licensed through DLR, will have taxes deducted in their payment received from DSHS. Persons providing respite for foster parents licensed through CPAs are paid directly by the private agency. Because DSHS maintains a contract with the CPA for its services, taxes for respite payments are deducted by DSHS before the funds are sent to the CPA for disbursement to the respite provider.
Each respite provider that is receiving payment must complete a W-9 tax form prior to providing care. Because each person’s tax status is different, the amount of tax deducted from their payment will vary.
IRS Publication 4694 states: Generally, payments you receive from the state or other eligible entity for providing care in your home to a foster child, perhaps your grandchild, are considered support for that child. These payments are not included in your income for federal tax purposes. However, if you receive payments to maintain space in your home for emergency foster care, you must include these payments as income for federal tax purposes.
IRS Information Letter INFO 2003-0061 states:
In general, under § 61 of the Internal Revenue Code, gross income is all income from whatever source derived, including compensation for services.
Under § 131 certain foster care payments are excludable from the gross income of a taxpayer who provides foster care. This exclusion applies only to a taxpayer in whose foster family home a qualified foster placement agency places a qualified foster individual.
Generally, payments to a respite care provider are taxable as compensation for services under § 61.
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