It depends. Foster care payments are generally considered support and not taxable, unless they are for respite care.
IRS Publication 4694 states: Generally, payments you receive from the state or other eligible entity for providing care in your home to a foster child, perhaps your grandchild, are considered support for that child. These payments are not included in your income for federal tax purposes. However, if you receive payments to maintain space in your home for emergency foster care, you must include these payments as income for federal tax purposes.
IRS Information Letter INFO 2003-0061 states:
In general, under § 61 of the Internal Revenue Code, gross income is all income from whatever source derived, including compensation for services.
Under § 131 certain foster care payments are excludable from the gross income of a taxpayer who provides foster care. This exclusion applies only to a taxpayer in whose foster family home a qualified foster placement agency places a qualified foster individual.
Generally, payments to a respite care provider are taxable as compensation for services under § 61.
If you received a Form 1099-NEC from a government or other agency for providing respite care, you would report this in TurboTax as income from self-employment and you could deduct any related expenses. You can report it in the 1099 section of Wages and Income, or if you are going to report it as a business and deduct expenses you would need a version of TurboTax that supports small businesses such as Home and Business Desktop or TurboTax Online Premium.
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