W-2 income for being the caregiver for a parent who lives in our house - isn't it tax exempt?

[DianeC958]

No, the wages you received are not tax-exempt.

You still need to file a tax return and pay any Federal or State income tax that may be due.

[TaxolTexas2020]

May depend on source of income. Income paid "by the child" is exempt from Federal Income, Social Security, Medicare, and Federal Unemployment taxes.  In California, the county Department of Health and Human Services may pay you for caretaker services for your disabled child or adult child, but your child is considered your legal employer and you receive a W-2 showing your child as the employer but with a DHHS federal employer number. (EIN)

See Form 1040 Schedule H and its instructions for tax treatment of your caretaker income.  With a rare exception, most caretaker income from child to parent, spouse, or their child under 21 is exempt from Income, Social Security, Medicare, and Federal Unemployment taxes. State tax treatment would be up to your child's state of residence.

I have not discovered yet how to treat the 2020 W-2 form that I received showing the caretaker income from my child.  There is no information on the form showing that it is tax-exempt nor information showing that the payee is the parent of the payor. Anyone know?

[CatinaT1]

TurboTax can exempt income under Notice 2014-7 per the IRS instructions. This Notice provides that certain payments received by an individual care provider under a state Medicaid Home and Community-Based Services Waiver (Medicaid waiver) program, are difficulty of care payments and excludable as income.  

  

Since you received a W-2, you should enter the information in TurboTax and then show an offset for this entry so that you will not be taxed on the payments. This will reconcile your tax return with what the IRS has received and then show the corresponding offset to explain why it is not taxable. You will also be able to recover the federal and state taxes that were withheld from your payments. Please see the steps listed below to enter your W-2 into TurboTax. 

  

It is also important to inform you that a recent court case, ruled that IHSS payments and Medicaid Waiver Payments are considered "earned income" for purposes of calculating the earned income tax credit and other credits. Even though the income is not taxable for income tax purposes, a taxpayer can choose to show the payments as earned income to claim a credit. 

  

The instructions below include steps to enter the payments as earned income to receive a credit or to report them as unearned income. Either way the payments will not be subject to federal or state income taxes. 

  

1. Sign into TurboTax Online, click Continue your return, then pick up where I left off (if you are using TurboTax CD/ Download, then just open your return on your computer); 

2. Click on Federal from the menu on the left-hand side and then click on Wages & Income at the top; 

   1. If you choose to report your payments to receive a credit:  

      1. Click Edit/Add next to Job (W-2);  

      2. click on Add a W-2; 

      3. enter the information as reported on your W-2. Enter the amount you received for IHSS Payments in Box 1 (even if this amount is not reported in box 1 of your W-2). 

   2. If you choose not to report it as earned income to receive a credit:  

      1. Scroll down to "Less Common Income";  

      2. click on Show More; 

      3. click on Start or Revisit next to Miscellaneous Income, 1099-A, 1099-C; 

      4. click on Start or Revisit next to Other reportable income; 

      5. select Yes 

      6. enter "In-Home Support Services Payments, EIN # (enter EIN number from W-2)" in the description box and then enter the amount from box 1 your W-2; 

      7. click Continue.  

3. To enter the offset for the payments (whether you chose to report as earned income or not):  

   1. Click on Wages and Income at the top of the screen; 

   2. scroll down to "Less Common Income"; 

   3. click on Show More; 

   4. click on Start or Revisit next to Miscellaneous Income; 

   5. click on Start or Revisit next to Other Reportable Income; 

   6. select "Yes" or "Add Another Income Item"; 

   7. in the "Description" section, enter "IRS Notice 2014-7 excludable income" and in the "Amount" section, enter the W-2 box 1 amount (or amount of IHSS Payments) as a negative (-) number. 

  

For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445 and the IRS FAQs. 

[ukhurshid]

Hello 

My question is regarding this topic. My wife is a caregiver for my father and she is enrolled with an agency for home and community based services. She received her w2 but for some federal tax box was empty but other taxes were paid. My question is in 2 parts (1) are caregivers responsible to pay the federal income tax (2) if yes then what steps are required to correct W4 form which was given to my wife when the home and community based services were started ?. It's just I want to make sure that federal income tax is properly being deducted if she is responsible for it because I do not want any issues with IRS in future. .

Thank you for the assistance 

[AnnetteB6]

Receiving a W-2 for income is the same for caregivers or any other workers.  When you report that income on your tax return, you are responsible for paying the Federal income tax.  If no taxes were withheld, then you may owe more taxes overall on your return.

However, depending on the other income on the return and whether a Married Filing Joint return is being filed where the other spouse had income taxes withheld, there may not be any 'penalty' for not having taxes withheld from every job.

TurboTax can help you determine whether any changes are required with respect to the W-4.  After you have entered all of your tax information, go through the TurboTax section for adjusting withholdings and creating a new W-4 for the employer.  

The TurboTax help article below will give you the steps to take and more information:

How do I update my 2023 withholdings and print a new W-4?

@ukhurshid 

[joyce64]

I was reading this and wondering how to do this.  I have already filed my taxes.  I was charged $5,002.00 in taxes because my income from consumer direct was reported in box 12 a code II medicare waivers. Can I do this for that and not pay this amount and avoid this charge next year as well as fix this year? Please help with any info