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, the IRS instructs you to follow this process: Certain Medicaid Waiver Payments (see Q11).
Here's how to fix it in TurboTax.
- Open your return and go to Wages & Income
- Under Wages and Salaries, select Start next to Wages and Salaries (W-2) to add your W-2
- After adding your W-2, come back to the Wages & Income screen and go to Less Common Income
- Nex to Miscellaneous Income, 1099-A, 1099-C, select Start
- Nex to Other reportable income, select Start and answer Yes
- For the description, enter Notice 2014-7
- For the amount, enter what's in Form W-2, Box 1 as a negative (-) number
- Select Done
Now your W-2 wages are reported on Form 1040, Line 1, with a corresponding deduction on Schedule 1, Line 8, with net zero income subject to tax. If tax was withheld and reported on the W-2, it'll be properly credited to your tax liability.
For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445.