Certain Medicaid waiver payments are treated as difficulty-of-care payments when received by an individual care provider for care of an eligible individual (whether related or unrelated) living in their home. These payments are excluded from gross income and shouldn't be included in your earned income.
If these payments are incorrectly paid to you in Box 1 of a W-2, first try to get a corrected W-2 from the payer. If you can't get a corrected W-2, follow one of these processes:
Exclude these payments from your return
Don't include this W-2 in your return. The IRS may contact you to explain why the payments were not included on your tax return. Explain that the payments are excludable from gross income under Notice 2014-7 as payments for in-home support services.
Don't enter the W-2 in the Wages & Salaries section
Instead, enter them this way:
If your W-2 has federal or state taxes withheld, enter these amounts as follows:
For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445.