Medicaid Personal Service Contract and Qualified Business Income

[MedicaidQs]

I am the recipient of income provided by a Personal Service Contract (reported to me on a 1099 MISC, Box 3 Other Income) that was part of a Medicaid planning process for my parent. I am treating it as self-employment as an independent contractor. Am I allowed to take a Qualified Business Income deduction?

[TomK2023]

To enter a 1099-MISC for miscellaneous income (Medicaid Waiver Payment)::

1. Open your return.
2. Click on Federal tab, then Wages & Income.
3. Scroll down to Other Common Income - Tax refunds, 1099-G, 1099-NEC, 1099-MISC, 1099-K, Click on down arrow.
4. Click on 1099-MISC Start/Revisit.
5. Enter info from 1099-MISC form (Payer, Federal ID #, Box 3 amount, etc.), Continue
6. Enter Description for reason for 1099-MISC; perhaps something like "Planning Process for Parent", Continue. 
7. On Does one of these common situation apply? page, Click on This income is a Medicaid Waiver payment..." Continue.  See image below.
8. Click on No that you don't have another 1099-YMISC (unless you do, of course), Continue
9. You should land on 1099-MISC Summary page.

[MedicaidQs]

Thanks for your prompt response. This isn’t a Medicaid waiver payment, but instead a lump sum payment that I know I have to pay taxes on as if I am an independent contractor according to the CPA that assisted with this last year. Now that I am preparing my taxes and adding this income using TurboTax Home and Business, I did not know how to respond to if this qualifies for a Qualified Business Income deduction. Would this qualify for this deduction?

[DianeW777]

Please review the information again and use this as a reference.  It sounds like your payments are for Medicaid waiver.

If your payments qualify to be excluded you should complete your tax return. 

• Medicare Waiver Payments Exclusion
• How do I enter my Medicaid waiver payments in IHSS in TurboTax?

You do not have to pay income tax or self-employment tax. if this is paid under the state program and should fall under the IRS Notice 2014-7.  This means that the income is not subject to tax and is allowed to be subtracted out using the steps provided here and by TomK2023.  

If you decide you are not being paid for this purpose, you can file the self employment income using the links below.  You can enter the income directly without using the 1099-MISC entry screen.

• How do I report income from self employment?
• Taking Business Deductions
• What self employment expenses can I deduct?
• What can I expense or depreciate with the business safe harbor election?
• Reporting Self Employment Business Income and Deductions

@MedicaidQs 

[MedicaidQs]

Thanks! These Personal Service Contracts (aka Family Caregiver Agreements) are actually legal documents that are drawn up by an estate attorney to assist with a Medicaid applicant's assets. For example, if a person has $10,000 in a bank account, a Personal Services Contract can be drawn up by an attorney to use that $10,000 to pay another person of their choosing to assist with things related to certain aspects of their care. This money/income is not associated with Medicaid or waivers/reimbursements/payments Medicaid might pay a person for. Because this money was provided to me through this contract, it is considered self-employment income, with a 1099MISC being provided to me by my parent. Just not sure how to answer whether or not this income qualifies for a Qualified Business Income deduction. That is the question I am truly stuck on with all of this. Any assistance with this question would be greatly appreciated! 

[MonikaK1]

An amount paid under a personal services contract could qualify for QBI depending on the terms. if an employee relationship is established, it should result in a W-2 being issued and in that case, it wouldn't qualify.

Search for the QBI Flow Chart in the Instructions for Form 8995 and follow the steps to help determine whether the income qualifies for the Qualified Business Income Deduction.

A qualified trade or business is any section 162 trade or business, with three exceptions:

1. A trade or business conducted by a C corporation.
2. The trade or business of performing services as an employee.
3. For taxpayers with taxable income that exceeds the threshold amount, specified service trades or businesses (SSTBs). 

Please see this help article, this IRS FAQ page, and this IRS webpage for more information.