IRS Rules for Caregivers: Why Hiring a Caregiver for In-Home Help Can Be Tricky

Do you provide financial support to a family member for in-home care? Are you expecting to?

America’s age demographics are rapidly shifting, with the population of adults 65 years or older increasing by 34% from 2012 to 2022.¹ At the same time, nearly 70% of these older adults will need some sort of long-term care in the near future – whether it’s in an assisted living center or at home.

If, like many adults with older parents or adult dependents, you are already paying a caregiver for in-home services – even casually – you might be an accidental employer of a household employee. That makes you responsible for paying employment taxes, or the so-called “nanny tax.”

An independent caregiver (also called a private caregiver) may be a household employee if:

• the care is provided in the home of the person receiving care
• you or another family member directs how care is provided to your loved one
• you provide the necessary supplies, tools or equipment
• the caregiver is not normally in the business of providing care to others

Exceptions to classification as a household employee could include cases when the caregiver is your spouse, parent, child under age 21 or a nonfamily worker under the age of 18. None of these are considered an employee. Although wages paid to a child, spouse or parent may be excluded from Social Security, Medicare and Federal Unemployment Tax Act taxes as described earlier, these wages are still subject to federal income tax for the caregiver.²

Hiring an employee caregiver for in-home help can be a paperwork-intensive process. It means calculating and keeping detailed accounts of all caregiver expenses, including the employee’s wages and taxes, and reporting state and federal income tax withheld, Social Security tax withheld or paid for the employee and Medicare tax withheld or paid for the employee. It will also include filing a Form W-2 to report the employee’s wages.  

Clearly, you’ll likely need the help of a tax professional.

IRS Publication 926 (Household Employer’s Tax Guide 2024) offers more in-depth information about filing employment taxes.³ Unless you enjoy the paperwork and added expense, you don’t want to be an employer. And you don’t have to be.

Here are two simple ways to get around it:

1. You can avoid paying employment tax if you hire a caregiver for in-home help who is self-employed. Whether a caregiver is self-employed is subject to a facts and circumstances test, but some general guidelines are whether the caregiver controls how the work is done, provides their own tools and offers their services to the general public as an independent businessperson or contractor.⁴  Also, a caregiver who provides services in the caregiver’s own home is generally not an employee but is considered self-employed.³
   
   However, it’s not often that you’ll find a caregiver who’s also an independent contractor. Because independent contractor caregivers operate as their own business entities, they’re also responsible for things like self-employment tax, certifications and insurance. Navigating these requirements on top of providing and marketing their services can be challenging for individuals.
   
2. You could also hire a caregiver through a licensed home care company. In that case, the company will take care of all tax obligations, workers’ compensation insurance and payroll issues, leaving you with a simple payment plan for services.
   
   Before selecting a company, first determine the level of care you’ll need and whether any medical assistance is involved. Does your loved one suffer from a serious condition requiring curative or palliative care? Or are they more independent without as much need for intensive personal care? You’ll want to know that the company you choose has a family caregiver who can handle your loved one’s medical needs.
   

Interview several companies before making your choice. It will take some legwork to determine whether a company is a good match for your needs.

To do that:

• Find out who owns the company and how long it has provided care in your area
• Verify that the company is licensed, bonded and insured
• Request a copy of its insurance declarations page as proof that it is properly insured
• Find out what in-house training is provided to caregivers and what ongoing training is mandated to keep their skills sharp
• Learn how the company vets the people it hires, including whether it runs a nationwide criminal search, drug screening and credit check. How often are drug screenings and criminal searches repeated?

Be prepared to honestly answer questions about your loved one’s health conditions so that the company can determine which of its services will best help maintain your loved one’s quality of life. The majority of older adults prefer to stay in their homes as they age, and finding the right caregiver for in-home help will help provide everyone peace of mind.

Whether the care is provided by a household employee or an independent contractor, you might also be eligible for the Credit for Child and Dependent Care.

Designed to offset some of the costs of care for children under age 13 – or a spouse or parent dependent who cannot care for themselves – the child and dependent care credit offers significant tax relief for families while they work or look for work. If married, both spouses must work or look for work to be eligible for this federal tax credit. Depending on the person’s gross income, this tax credit can cover up to 35% of $3,000 in employment-related caregiver expenses for one dependent, or up to 35% of $6,000 for two or more dependents.⁵

Here’s a hypothetical example of how it works:

John and Jane both work, and pay for in-home caregiver support for Jane’s father, Jim. Unfortunately, John has a serious fall at work and becomes incapacitated. To help offset the costs of caregivers for two qualifying adult dependents, Jane claims the child and dependent care credit for both John and Jim. With John and Jane’s joint income, they qualify for a 20% tax credit on caregiver expenses of up to $6,000. Assuming Jane paid at least $6,000 in caregiver expenses for both John and Jim, she can claim a credit of $1,200 on her and John’s joint tax return.

Apart from these credits, some programs like Medicaid, VA Aid and Attendance or others may pay a person to provide care for their disabled family member. However, the availability of these programs depends on many factors, including: ^6,7

• Geographic region and state of residence
• Income level
• Assets
• Types of insurance held by the disabled person
• Whether the disabled person is a veteran

Navigating the complexities of IRS rules for caregivers is no easy task. Whether hiring an employee caregiver, an independent caregiver or an agency caregiver, you’ll need to understand the practical and tax implications to make informed decisions.

For families stepping into the role of caregiver employers or contracting for in-home support, it’s crucial to stay informed about the evolving tax landscape and IRS regulations. Consulting with your tax professional for personalized advice can help you focus on providing the best possible care for your loved ones. Ultimately, the goal is to ensure that your family members receive the care they need in the comfort of their homes while effectively managing the financial implications.

Connect with a financial planner today to learn more about how to plan for these issues with a goal of maximizing family care.

¹ Harvard’s Joint Commission for Housing Studies. (2023). Housing America’s Older Adults. Retrieved April 4, 2024, from https://www.jchs.harvard.edu/sites/default/files/reports/files/Harvard_JCHS_Housing_Americas_Older_Adults_2023.pdf

² Internal Revenue Service. (2023, May 30). Family Caregivers and Self-Employment Tax. Retrieved April 17, 2024, from https://www.irs.gov/businesses/small-businesses-self-employed/family-caregivers-and-self-employment-tax

³ Internal Revenue Service. (2024). Publication 926: Household Employer's Tax Guide (For use in 2024). Retrieved April 4, 2024, from https://www.irs.gov/pub/irs-pdf/p926.pdf

⁴ Internal Revenue Service. (2024, March 4). Hiring household employees. Retrieved April 4, 2024, from https://www.irs.gov/businesses/small-businesses-self-employed/hiring-household-employees

⁵ Internal Revenue Service. (2024, January 9). Child and Dependent Care Credit Information. Retrieved April 4, 2024, from https://www.irs.gov/credits-deductions/individuals/child-and-dependent-care-credit-information

⁶ Family Caregiver Alliance. (2024). Family Caregiver Services By State. Retrieved April 17, 2024, from https://www.caregiver.org/connecting-caregivers/services-by-state/

⁷ U.S. Department of Veterans Affairs. (2023, February 22) The Program of Comprehensive Assistance for Family Caregivers. Retrieved April 22, 2024, from https://www.va.gov/family-member-benefits/comprehensive-assistance-for-family-caregivers/#:~:text=Eligible%20Primary%20and%20Secondary%20Family,the%20Veteran%20to%20receive%20care