personal sevices contract

The payments issued by Florida Medicaid Personal Services Contract (PSC) are considered taxable earned income by the IRS.  This includes any lump sum payments.  Under standard tax rules, the IRS applies the constructive receipt rule which means even if a lump sum covers multiple future years of expected caregiving, the entire taxable amount must be reported in the tax year it is physically received.

There are two methods to report PSC payments.

• Method 1: Reporting as Household Employee Wages (Form W-2): If you provide care in the care recipient's home and follow their schedule/direction, you are generally classified as a household employee.

  • If your employer issues a Form W-2, report the amount from Box 1 on Form 1040, Line 1a.

  • If your employer fails to issue a W-2 or withhold FICA taxes, report the earnings on Form 1040, Line 1d (or attach Form 8919 using Code H) to compute and pay your required employee share of Social Security and Medicare taxes.

• Method 2: Reporting as Self-Employment Income (Schedule C & Schedule SE): If you operate as an independent contractor providing caregiving services:

  • Report the gross lump-sum amount on Schedule C (Form 1040), Line 1.

  • Calculate and report net earnings and self-employment tax (Social Security and Medicare) on Schedule SE (Form 1040).

  • Transfer net business profit to Schedule 1 (Form 1040), Line 3, which flows directly to Form 1040, Line 8 (Additional Income).

IRS Notice 2014-7 allows certain Medicaid waiver payments to be excluded from gross income if the caregiver resides in the same home as the care recipient. However, a Medicaid PSC is a private contractual prepay for direct personal services, so it does not qualify for the Notice 2014-7 tax exclusion.

Helpful Links:

• IRS Resources:

  • IRS Guidance: Family Caregivers and Self-Employment Tax – Details when family caregiving counts as self-employment income versus household employment.

  • IRS Publication 926: Household Employer's Tax Guide – Outlines wage reporting rules, FICA obligations, and filing requirements for household caregivers.

  • IRS Notice 2014-7: Certain Medicaid Waiver Payments – Explains the narrow conditions required for caregiving income exclusions.

• TurboTax Help Articles:

  • TurboTax - Tax Tips for Nannies and At-Home Caregivers – Explains how to report household employment wages versus Schedule C income.

  • TurboTax - How to Report Income from Self-Employment on Form 1040 – Walks through reporting business income on Schedule C and calculating Schedule SE tax.