What are the rules of paying an adult child taking care of an elderly parent? What are the tax responsibilities for the adult child and the elderly parent?

[kenpachi79]

I need to know the federal and Indiana State tax laws about paying an adult child who is taking care of his/her elderly parent.

[TomK2023]

In order to claim a parent(s) as a dependent: .

• Do they live with you? Your relative must live at your residence all year or be on the list of “relatives who do not live with you” in Publication 501. About 30 types of relatives are on this list.
• Do they make less than $4,400 in 2022? Your relative can't have a gross income of more than $4,400 in 2022 and be claimed by you as a dependent.
• Do you financially support them? You must provide more than half of your relative’s total support each year.

In all cases, to claim someone as a dependent on your tax return, you can't be claimed as a dependent on someone else’s return.

[kenpachi79]

I don't need to claim my mother as my dependent.   She is thinking about formally paying me as her caregiver.   We are looking at the tax advantages and disadvantages of her paying me as a formal employee (read: I receive a W-2) or as an independent contractor (read: I get a 1099-MISC).   

[JosephS1]

As far as tax advantages between being paid as an employee or receiving a 1099-NEC, there is little difference on the money side but a sizable difference on the bureaucratic side.  As being paid on Form 1099-NEC your mother needs only file the a 1096 and 1099-NEC with the IRS.  Being paid on Form W-2 necessitates applying for and receiving and Employer Identification Number (EIN), if necessary filing employer reporting forms 940, 941, State unemployment, State withholding, and local withholding, if any.  The minimum reporting for household employees is Schedule H for the employer form 1040.

You as the recipient will file your return as normal if you receive a W-2.  You will need to file a Form Schedule C with your tax return if you receive a 1099-NEC and you will need to keep track of any expenses you incur during your caregiving duties.  

The taxes withheld if you are paid via a W-2 will be paid by your mom and she will need to contribute an equal amount of Social Security and Medicare Tax when the amounts are remitted to the IRS.  Also, unemployment is an employer's responsibility with normally little withholding being taken from an employee.

Receiving a 1099-NEC, you will claim the net as ordinary income and that amount is used to calculate the self-employment tax (Social Security and Medicare).

Overall I would suggest having your Mom pay you with a 1099-NEC if it is determined she is allowed.  Look to the Household Employees regulations and check with your state Seniors organizations if you can also be paid as a caregiver.

What is Schedule H, Household Employees

IRS FAQ Household Employees

Family Caregiver Tax Breaks

@kenpachi79