Yes, that income is also not taxed by CA but cannot be used as earned income for the purpose of claiming earned income credit. 

I am living with my recipient in state of California so there was no Federal or State withholding. Only Social Security tax, Medicare tax and CA SDI were deducted.  

I am not using it for earned income credit. I have already added the W2 in Federal income and offset it by negative amount under, 'Miscellaneous Income/Other reportable income' using "IRS Notice 2014-7" description.

Now for State, under ' Income and adjustments' there is also an option for 'In-Home Support Services Supplemental Payments'. My question is should I enter the payment here as well? or am I double dipping?

Thank you.

I did a test return and after I adjusted the W-2 amount with a negative amount as you did, I found that the adjustment was carried to the CA 540 without any other input required.