My husband is my caregiver and gets paid to take care of me through a state program. We were told that we do not have to pay taxes on his income earned taking care of me. I’m wondering if we shou

[AmeliesUncle]

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@DianeW777 wrote:

Yes the method below should be used. No.  Schedule C is not the appropriate place to enter this income. 

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What is the basis of that conclusion?  A person can certainly be paid as an Independent Contractor under a Medicaid Waiver, if the circumstance show that the person is a Contractor.

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@DianeW777 wrote:

Because the IRS ruled that this income does qualify for earned income tax credit (EITC) purposes means the employee portion of social security and Medicare taxes must be paid. 

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What makes you say that Social Security and Medicare need to be paid to qualify for the EIC?  As far as I know, there is nothing to support that statement.  And it was a COURT that ruled that the income qualifies for EIC, not the IRS (although the IRS says you have the OPTION to claim it for EIC purposes or not).

[davidruan7]

@DawnC @DianeW777 

Here is what I got from another group, can you take a look and let me know if that is correct way to do it, if not, would you mind to tell me what is wrong with that, really appreciate for your help.

Obviously, what they are talking about is 2016 tax filing.

Form 1099-MISC, Box 3:Generally, amounts reported to you in Box 3 of Form 1099-MISC are reported on Form 1040, Line 21 as other income. However, if you choose to apply the Notice to payments received in 2016, you would not include the payments on Line 21. If you are filing electronically, do not report the Form 1099-MISC. If you file a paper return, write "Notice 2014-7" to the left of Line 21.
Form 1099-MISC, Box 7:Generally, amounts reported to you in Box 7 of Form 1099-MISC are reported on Schedule C as business income. If you choose to apply the Notice to payments received in 2016, you will enter the income on Schedule C through the Form 1099-MISC, but will also report the excludable amount as a Schedule C expense.

To enter the Form 1099-MISC, Box 7 income on Schedule C:

1. From within your TaxAct® return (Online or Desktop), click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
2. Click Form 1099-MISC to expand the category and then click 7-Nonemployee compensation
3. Select Schedule C, Profit or Loss from Business and then click Continue. Note, if you have already created a Schedule C, click Add to create a new copy of the form or click Review to review a form already created. If not, the program will proceed with the interview questions for you to enter or review the appropriate information.

Once you have entered the Form 1099-MISC income, the program will bring you through additional screens to complete the Schedule C. To enter the excludable amount as an expense, continue to the screen titled Business Income - Expenses, and click Yes. Continue to the screen titled Business Income - Expenses with an entry field for Qualified Medicaid waiver payments exclusion (Notice 2014-7). Enter the excluded amount on this screen.

Form W-2:Generally, amounts reported to you in Box 1 of Form W-2 are reported on Form 1040, Line 7 as wages. If you choose to apply the Notice to payments received in 2016, you will enter the income in the Wages and Salaries section of the Federal Q&A, but will also report the excludable amount as a negative adjustment on Form 1040, Line 21.

To enter the Form W-2:

1. From within your TaxAct return (Online or Desktop), click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
2. Click Wages and Salaries to expand the category and then click Wage income reported on Form W-2
3. Click Add to create a new copy of the form or click Review to review a form already created 
4. Click Quick Entry or Step-by-Step Guidance
1. If you select Quick Entry, fill in the form to match your paper copy of Form W-2 and be sure to scroll down to answer questions.
2. If you select Step-by-Step Guidance, the program will proceed with the interview questions for you to enter or review the appropriate information.

To enter the adjustment on Form 1040, Line 21:

1. Click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
2. Click Other Income to expand the category and then click Prizes, awards and other miscellaneous income
3. On the screen titled Miscellaneous - Amounts Received, enter the excluded amount in the field for Medicaid waiver payments to care provider.

When you print your return, the text See Attached will print to the left of Line 21 on the Form 1040. An attached sheet will print with the return titled Other Income - Supporting Details for Form 1040, Line 21 which will print both the description and amount that was entered.

[DianeW777]

Based on the IRS FAQs Medicare Waiver Payments  about Independent Contractors receiving Form 1099-NEC (formerly 1099-MISC),  as discussed in questions 19 and 20, it seems you could be considered an independent contractor.  In this case if you add the income on Schedule C and then subtract it out as a miscellaneous expense, the EITC does not come into play on your tax return so it would not be a consideration.

Lastly, Form SS-8, used by the IRS,  helps determine the difference between independent contractor and employee.  Since this is a state funded program, it would seem they would be following the IRS guidelines to report the income to the caregivers based on facts and circumstances in each case.

All that being said, you can report the amount on Schedule C and this would eliminate Form 8919 and employee portion of FICA taxes.

[davidruan7]

Hi, @DianeW777,

Thanks so much for your help, after reading the IRS doc(Certain Medicaid Waiver Payments May Be Excludable From Income | Internal Revenue Service (irs.gov)), I think this Q13 describe the exact situation as my 1099-NEC, since I don't run any business as stated in Q14. 

So my silly question is: how do I input this  “Notice 2014-7” in turboTax, and did that mean I don't report the number in my 1099-NEC in turboTax at all.

Or, I can treat myself as a sole proprietor in a business of providing home care services, even though I don't actually own a business, and follow the answer in Q14 to cancel out the 1099-NEC income as business expense?

Thanks a lot!

Q13. I provide services under a state Medicaid Home and Community-Based Services waiver program. The agency that pays me for these services does not treat me as an employee, and I do not have a separate trade or business of providing these services. However, the agency reported the payments as income on Form 1099-MISC, Miscellaneous Income. How should I report to the Service that these payments are excludable from gross income?

A13. You should enter -0- on line 21 of Form 1040 if you have no other income reportable on line 21. If you have other income reportable on line 21, you should enter the amount of the other reportable income on line 21. You should write “Notice 2014-7” on the dotted line for line 21 on a paper return or enter “Notice 2014-7” on line 21 for an electronically filed return. Because the payments are excludable from income, and because you do not have a trade or business of providing these services, the payments are not self-employment income subject to self-employment tax.

Q14. I am a sole proprietor in a business of providing home care services. In my business, I received payments that areexcludable from gross income under Notice 2014-7. However, I received a Form 1099-MISC, Miscellaneous Income, reporting these payments as income. How should I report to the Service that these payments are excludable from gross income?

A14. You should include the full amount of the payments reported to you on Form 1099-MISC as income on line 1 of Form 1040 (Schedule C). You should then report the excludable amount as an expense in Part V, and write “Notice 2014-7” next to that amount. Even though you are a sole proprietor, because the amounts are excludable from income, they are not self-employment income and are not subject to self-employment tax. For additional Q&As discussing the application of self-employment tax to family caregivers, follow this link:  /Businesses/Small-Businesses-&-Self-Employed/Family-Caregivers-and-Self-Employment-Tax. 

[gaya3bn]

This is done in 2 parts 

Part 1: Enter your caregiver income using the following steps (do not enter the Form 1099-NEC).

1. Open your TurboTax return > Under Wages and Income scroll to Miscellaneous Income
2. Select Other income not already reported on a Form W-2 or Form 1099 > Start or Revisit
3. Select Yes under Did you receive any other wages > Continue
4. Continue to screen Certain nontaxable Medicaid waiver payments not reported on Form W-2 or 1099 >Enter the amounts you received in Medicaid waiver payments field as a positive number.
5. This would take into account the income for reporting purpose. 

This will eliminate adding self-employment tax which does not apply.  Keep the 1099-NEC with your tax documents. 

Part 2: Follow these steps to remove the income from your tax return.

1. Scroll down the page to the last section titled: Less common Income and click show more;
2. Select start or update next to the last topic titled Miscellaneous Income, 1099-A, 1099-C;
3. Scroll down to the last option titled Other reportable income and select start or edit;
4. When it asks, "Any other reportable income?" say yes then you will make one entry
5. Enter this description: IRS Notice 2014-7 excludable income and enter the W-2 Box 1 amount as a Negative (-) number

When you return to the Wages & Income page, scroll to see the negative income beside Miscellaneous Income, 1099-A, 1099-C; This will remove the income on your return for the IHSS or other payments received by an individual care provider under a state Medicaid Home and Community-Based Services Waiver program.

Thus by doing part 1, your  AGI still continue to report your income to IRS and part 2 eliminates the income you received thus your taxable income does not increase because of this receipt.