IHSS Payments - are they now taxable by California or not?

[Itsjess73]

Hi there, 

I am a live in provider for two recipients on ihss. I was exempt and had no taxes taken out therefore I didn’t receive a w2. If I follow these directions, when entering the income for the year can I use my last paystub? 

[MonikaK1]

You would only refer to your paystub if you need to report the income for purposes of the Earned Income Credit; you don't enter this in the W-2 section if you didn't receive a W-2. Qualifying Medicaid waiver payments are exempt from Federal and California income.

Your In-Home Supportive Services (IHSS) income may be exempt for both your California and your Federal returns if you received income from a Medicaid waiver or IHSS program for providing care to an individual you lived with.

If your income was exempt, you didn't have any taxes taken out, and didn't receive a Form W-2, you don't have to report the income on your returns.

If you wanted to use the income to qualify for Earned Income Credit:

1. Sign in to TurboTax and open your return.
2. Select Federal, then Wages & Income.
3. Under Less Common Income, select Start or Revist next to Miscellaneous Income, 1099-A, 1099-C.
4. Select Start or Revisit next to Other income not already reported on a Form W-2 or Form1099.
5. Answer Yes to Did you receive any other wages?  and Continue.
6. Continue through the screens, leaving the boxes blank until you get to the Certain nontaxable Medicaid waiver payments not reported on Form W-2 or 1099 screen.
7. Enter the amount of Medicaid waiver payments and Continue.
8. Finish entering the rest of your income.
9. When you get to the Earned Income Credit section in Deductions and Credits, we’ll ask if you want to add your Medicaid waiver payment to your income for this credit. You can answer based on what benefits you most.

See this TurboTax help article under "I received a 1099 or no form" for more information.

 [Edited 02/12/24| 9:51am PST] 

 @Itsjess73    (edited) 

[sislogan2]

ok, how would I back out payments on my tax forms?

[Vanessa A]

If  your W-2 for IHSS payments does not have $0 in box 1, then after you enter the W-2 you will come to a screen that says Lets Check  for uncommon situations.  There you will check the box that says "Nontaxable Medicaid Waiver payments that qualify as difficulty of care payments"

Then you will answer the questions of how much of that was for difficulty of care and if you received any payments not for difficulty of care on that W-2. 

This will cause the income you received to be deducted on Schedule 1 line 8s as an adjustment to your income.  

Only the payments made that are considered Difficulty of Care Payments qualify to be removed from your income.

[next_milenium]

I also received a W-2 with $0 in box 1 as a live-in IHSS provider.

Social Security and Medicare Taxes were withheld in boxes 4 and 6.  I think I read somewhere that when your IHSS income is non-taxable, you don't have to pay Social Security tax? Is this true? If so, how can I get a refund?

[CatinaT1]

No, that is not correct. You do not pay income tax on the money, but you do still pay Social Security and Medicare taxes.

TurboTax can exempt income under Notice 2014-7 per the IRS instructions for Medicaid Waiver payments from IHHS. 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. Additionally, you can choose to use this income to calculate Earned Income Credit. Regardless, the income will remain non-taxable.     

This tax-exempt income can be reported to you differently depending on the State and County you live in. You might receive a W-2, 1099, and no form at all.   
 

See the instructions below for how to report this depending on how the income was reported to you.  

If you received a W-2 with $0 in Box 1:  

1. Sign in to TurboTax Online, click Continue to 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 Taxes, and then click on Wages & Income;     
3. Under Wages and Income, click Start;      
4. Click on Work on my W-2, and enter the information as reported on your W-2.     
5. After entering all your W-2s, you will see the screen, Let’s check for uncommon situations. Next to Nontaxable Medicaid waiver payments, check the box.  
6. You will enter the amount of Medicaid Waiver Payments into the box asking for the total amount of difficulty of care payment you received from IHHS. This will be the same amount reported in Boxes 3 and 5 of your W-2.  
7. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most.  

If you received a 1099 or no form:  

1. Sign in to 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 Taxes, and then click on Wages & Income;     
3. Scroll down to Less Common Income;       
4. Click on Start next to Miscellaneous Income, 1099-A, 1099-C.  
5. Click on Start next to, Other income not already reported on a Form W-2 or Form 1099;      
6. Answer Yes to Did you receive any other wages?;      
7. Leave blank the box for Wages earned as a household employee and click continue;  
8. Leave blank the box for Sick or disability pay and click continue;       
9. Enter the amount of Medicaid waiver payments on Certain nontaxable Medicaid waiver payments not reported on Form W-2, and click Continue.  
10. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most.  

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

[lauracurran]

Hello,

I am need of assistance. I received no form and am a live in IHSS provider. I followed your steps exactly under if you received a 1099 or no form to see if I should include the IHSS income or not - it was better for me to not include the IHSS income because I qualified for the earned income tax credit when I did not include it. I checked the box to not include the income. My tax refund was calculated then giving me the earned income tax credit and submitted to the IRS. I received a notice from the IRS  cp12 stating that they "found an error on your 2023 form 1040 which affects the following area of your return - Earned Income tax credit. We changed your return to correct this error. 

So now I am not getting the earned income tax credit even though I selected to not have the income included in my tax return. It shows on my income tax transcript that they included the medicaid waiver payments in their calculations. I have reached out to turbo tax assistance and got no where. I also reached out to the IRS and was told I need to amend my taxes. However there is nothing for me to amend because the income is non taxable and is correctly listed on my tax return. I need help to fix this with someone who understands IHSS income. 

[Vanessa A]

You can exclude IHSS payments from your Earned Income to not be taxed, however, you cannot exclude it from the calculation for the Earned Income Tax Credit. When calculating the EITC, the Medicare Waiver payments are added back to your income.

Medicaid waiver payments. When completing the worksheet in Step 5 of the Form 1040 instructions, line 27, enter the Medicaid waiver payments you excluded from income on Schedule 1 (Form 1040), line 8s, unless you choose to include these amounts in earned income, in which case enter -0-. For more information about these payments, see Pub. 525.

[_8571]

Hello,

I receive IHSS payments for 2 recipients that live in my home. I only receive a W-2 for 1. In box number  1 there is a very small number listed that is not what I made the entire year. Every other box has 0. 

When I get to “other income” Medicaid waiver or IHSS payments to care provider it says

Enter your nontaxable Medicaid waiver or IHSS payments NOT included on W-2s that you’d like to include in earned income.

1) Is this where I would put the 1 recipient who I did not receive a w2s payments? Would I just use my YTD amount?

2)Do I combine both recipients payments together even though I only received a W2 for 1? 

I went to H&R Block and they were just as confused as me. I appreciate any help you can provide. 
Thank you

[Vanessa A]

You would enter them separately.

Yes, you would enter the one that you did not receive payment for in the Other Income section as you described. 

You would enter the other one as a W-2, but only include the income on the W-2, then select that this is a Medicaid Waiver payment after you enter the W-2. 

[trwatson]

This is not correct.  I plugged in the w-2 info from IHSS including all zeroes for income, and inserted the $ amount in box 12a -- then went to "uncommon situations" and selected non-taxable medicaid waiver payments, TurboTax erroneously continues to treat this as income-- and miscalculates that amount as Social security tax UNPAID.  This is a broken loop in the program: I can't owe that amount of social security on zero income. 

[MagooGuy]

For the 2024 tax year, most of the information in this thread may be incorrect or misleading.  The IRS added an option in 12a to report and classify the waiver income. The code is "II". The state of California should have sent W2s to live in providers with $0 in box 1 and the waiver wagers in 12a. The code for box 12a should be "II". Don't fill out the uncommon situations section in Turbotax. Turbotax will see the 12a income and ask you if you want to use it for the EITC calculation. If you want to E-File your return you'll have to enter $1 in box 1.  

I've already filed my taxes this year and received my state refund. So the new W2s from the state work as expected.

Good Luck!

[trwatson]

Thanks for the heads up.  After reviewing my w-2 statement with a magnifying glass, I saw the "II" code, but am still unclear how to input this in the return.  Also, even though box 1 is reported by the state as $0, are you saying you can report $1 instead and have the returns accepted when e-filing?

Any insight you can offer is greatly appreciated-- turbotax help systems are pretty worthless. . .

[SusanY1]

Yes, you enter $1 in Box 1 (rather than 0) in order to e-file.  It will not materially affect your tax return. 

For the Box 12 Code II, simply select code II- Medicaid waiver payments excluded from gross income under Notice 2014-7 in the Box 12 code area, and input the amount from your W-2 into the Box 12- Amount Column.  
 

You can find detailed support on this topic here:  How do I enter my tax-exempt Medicaid Waiver payments from IHSS in TurboTax?
 

[MagooGuy]

I don't recommend following the instructions on that page. I've dealt with this for 10 years on my taxes. This is the first year I've reported my W2 for IHSS. The IRS introducing "II" in box 12a should have fixed all the problems people have been having. In the past when I followed the official Turbotax instructions my tax return gets messed up.

So this year I decided to test this new "II" code in box 12a. TL;DR it works correctly in Turbotax. To help everyone I'm going to cover what I did in Turbotax.

I started off by doing my taxes like I do every year and ignore the IHSS W2. AKA I don't enter it on my tax return. My IHSS W2s have always had $0 in box 1. Boxes 3 and 5 have a non zero dollar mount. You aren't exempt from paying social security and medicare taxes. Once everything was entered I saw what my refund would be. Now I have a baseline to compare to.

Now I enter the IHSS W2 to see what happens. CA was nice to notify me of the W2 changes this year. I looked at the W2 and saw the new box 12a entry with code "II". So I thought maybe the IRS has fixed this crap finally. I decided to take a leap of faith and ignore everything I read and tried in the past. I went to the income section of Turbotax and entered the IHSS W2 just like any other W2. I entered the 12a amount and clicked on the code menu. YEY! Turbotax had the new "II" code in there. When the uncommon situations screen came up I told it I didn't have any. I DIDN'T check the medicade waivers box. Just don't. I moved on to revisit the EITC wizard. The wizard saw that I had a W2 with an amount in 12a with the code "II" and asked if I wanted to include it in the EITC calculation. Well, Turbotax seems to be working as expected this year (finally). I moved on to check my refund amount. It matched the refund amount I got the first time through. Then I went to e-file my taxes. DANG! I was reminded that you cant e-file when a W2 has $0 in box 1. Sooooooo, back to the income section to edit the IHSS W2 and enter $1 in box 1. After going through the checks for the 3rd time, I e-filed my return.

I hope my story errr rant helps someone out.