In-home elder care

[Gerry1027]

My husband and I are, respectively, 79 and 82.  I have Parkinson's and my husband is diabetic and has dementia.  Neither of us drive anymore.  Will we be able to claim as a medical deduction the money we pay for in-home care by private parties rather than companies?  We have four women who share the job, and we pay them in cash, without withholding taxes.  They give my husband his insulin shots and medication, cook our meals, do laundry, take us to doctor appointments, and do light housekeeping and grocery shopping.  

[Opus 17 · Accepted solution]

For in-home caregivers, you can deduct the cost of nursing services.  The services do not have to be provided by a nurse but they must be the kind of services that nurses usually provide, such as providing medication, checking vital signs, changing dressings, and assisting with grooming, bathing, and using the toilet.  Assistance with other home services, such as cleaning and meal prep, is not deductible.  If the caregivers provide both nursing and non-nursing services, you will have to determine a reasonable allocation as to how much of the cost is nursing services.  See publication 502.

https://www.irs.gov/forms-pubs/about-publication-502

Separately, if you pay more than $2700 per year to someone who works in your home, they may be your household employee.  If they are, you must withhold household employee taxes, pay those taxes as part of your tax return, and issue them a W-2.  See publication 926.

https://www.irs.gov/forms-pubs/about-publication-926

In some cases, the home care worker might be a self-employed person acting as an independent contractor.  In that case, you can pay them cash and don't have any other obligations.  The determination of who is an employee and who is self-employed depends on the nature of the relationship, and who has control over the time, place and manner of the work.   The IRS has more information here, and you may want to have a discussion with the caregivers about how they want to be treated.  There can be severe penalties if you treat someone as a contractor, and they file a complaint and the IRS later determines they should have been treated as an employee.  

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

If you determine the caregivers are household employees, and you pay household employee tax on your tax return in addition to the wages, those taxes (or a portion of those taxes) are also allowable as medical expenses in the same proportion as their services count as medical expenses.  

[redwoodreturn]

Thank you very much for your detailed response which provides much clarification for me.

I take it it may be an uphill battle convincing the IRS that a caregiver paid more than $2700 per year is not a household employee, even if for all practical  purposes the arrangement  aligns with the criteria of the caregiver being a self-employed person?

[Opus 17]

@redwoodreturn 

The difference between an employee and an independent contractor comes down to control -- who controls the time, manner, and place of work. There is some general guidance in publication 926, and some other guidance on the difference between employees and contractors here.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

https://www.irs.gov/publications/p926

About the only thing you can do is to document the arrangement (at the time of the arrangement) and why you think the caregiver is a contractor and not an employee, and keep that in case of audit.  It's unlikely that you will get audited at random, and more likely that one of the caregivers would file a complaint with the IRS claiming they were hired as a contractor when they should have been an employee (form SS-8) (because being a contractor is a bit more expensive for the person than being an employee). 

https://www.irs.gov/forms-pubs/about-form-ss-8