I disagree with Mary.
The correct way to enter it is to enter the W-2 as you normally would and offset it in Miscellaneous income citing 2014-7 Medicaid Waiver Payments or Caregiver Payments.
It is discussed in another thread, "IRS Notice 2014-7 excludable income", but caregiver payments are consider earned income and count towards the Earned Income Tax Credit and other areas, but the offset zeros out the income for federal purposes. It also makes it easier for the IRS to match W-2s.
If the income is taxable on the state return, then there should be an adjustment on the state return to add it back it.
This is the heart of Notice 2014-7 and it maintains all the benefits the taxpayer(s) is/are entitled to.
