Medicaid Home and Community-Based Services (HCBS) waiver programs are vital in enabling individuals who would otherwise require institutional care to receive support in their own homes or community settings. The Internal Revenue Service (IRS) Notice 2014-7 offers crucial guidance on the federal income tax treatment of payments made to individual care providers under these Medicaid waiver programs. This guide aims to clarify IRS Notice 2014-7, addressing key questions about eligibility, tax exclusions, reporting requirements, and employment tax considerations for Medicaid waiver payments. Understanding these guidelines is essential for care providers to accurately manage their tax obligations and maximize their financial well-being. This article provides a detailed overview to help navigate the complexities surrounding What Program For Foster Care Payments Medicaid Waiver Payments really refers to in terms of tax implications for care providers.
Who Qualifies for Medicaid Waiver Payment Tax Exclusions?
The central point of IRS Notice 2014-7 is that certain payments received by individual care providers under state Medicaid HCBS waiver programs can be excluded from their gross income for federal income tax purposes. These payments are treated as “difficulty of care payments,” which are generally excludable under Section 131 of the Internal Revenue Code. However, specific conditions must be met to qualify for this exclusion.
Defining the “Provider’s Home”
A key aspect of the exclusion is that the care must be provided in “the provider’s home.” This definition is broader than simply the house owned or rented by the care provider. According to IRS guidance and legal precedent (Stromme v. Commissioner), “the provider’s home” is defined as the place where the provider resides and conducts their daily life, including meals and family routines.
- Scenario 1: Moving into the Care Recipient’s Home: If a care provider moves into the home of an elderly parent or another care recipient to provide care, and this becomes their primary residence, then the care recipient’s home is considered the provider’s home for the purposes of this exclusion.
- Scenario 2: Separate Home Maintained: If a care provider works in the care recipient’s home but maintains a separate home where they live most of the time and perform their personal routines, then the care recipient’s home is not considered the provider’s home. In this case, the Medicaid waiver payments would not be excludable from gross income.
- Scenario 3: Shared Home, No Other Residence: If a care provider lives in the care recipient’s home full-time and does not maintain another separate residence, then the shared home qualifies as the provider’s home. Payments received for care in this shared home are excludable.
Multiple Care Providers in the Same Home
It’s possible for multiple care providers living in the same home as the care recipient to exclude Medicaid waiver payments from their gross income. For example, if both a parent and a sibling reside with and care for a disabled child, both can potentially exclude the Medicaid waiver payments they receive.
Respite Care and Location of Services
The exclusion specifically applies to care provided in the individual care provider’s home where the care recipient also lives under a plan of care. Respite care providers who offer services in the care recipient’s home (where the provider doesn’t live) or in the provider’s home (where the care recipient doesn’t live) do not qualify for this income exclusion. The location of care is critical for determining eligibility.
Impact of Cost-Sharing Provisions
Even if a Medicaid waiver program has cost-sharing provisions that require the care recipient to contribute to the cost of care, the individual care provider can still exclude the entire payment they receive from the program administrator. However, this exclusion does not extend to direct payments made by a care recipient from their private funds to cover part or all of the care costs.
Exclusion Does Not Extend to Vacation Pay
While payments for care services under a Medicaid waiver program may be excludable, other types of payments, such as vacation pay, are not. The exclusion is strictly limited to payments directly related to the care of the disabled individual.
Reporting Medicaid Waiver Payments on Your Tax Return
Understanding how to report Medicaid waiver payments on your tax return is crucial for compliance. The reporting method depends on whether you receive a Form W-2 as an employee or Form 1099-NEC/MISC as a non-employee or independent contractor.
Reporting When Form W-2 is Received
If you receive a Form W-2 that includes Medicaid waiver payments in Box 1 (Wages, tips, other compensation), you should still report the full amount on Line 1 of Form 1040 or Form 1040-SR. To account for the excludable portion, you will then subtract this amount as “Other income” on Schedule 1, Line 8, and write “Notice 2014-7” on the dotted line or in the electronic filing software. If the excludable amount exceeds other income on Schedule 1, Line 8, you may need to enter a negative amount.
Reporting When Form 1099-NEC or 1099-MISC is Received
If you receive Form 1099-NEC (Nonemployee Compensation) or Form 1099-MISC (Miscellaneous Income) for Medicaid waiver payments and you are not operating a business providing these services, you should report the amount on Form 1040, Line 1d. Then, list the excludable amount as “nontaxable Medicaid Waiver Payments” on Schedule 1, Line 8s. Because these payments are excluded from income and you are not in the business of providing these services, they are not subject to self-employment tax.
For sole proprietors operating a home care business who receive Form 1099-NEC or 1099-MISC, you should include the full payment amount as income on Schedule C (Profit or Loss from Business). Then, report the excludable amount as an expense in Part V, “Other Expenses,” and write “Notice 2014-7” next to it. Even as a sole proprietor, these excludable payments are not considered self-employment income and are not subject to self-employment tax.
Choosing to Include Payments for Earned Income Credits
For open tax years, care providers have the option to include excludable Medicaid waiver payments in their earned income calculation for the Earned Income Credit (EIC) or the Additional Child Tax Credit (ACTC). This election must be for the full excludable amount, not a portion. This can be beneficial for those who might qualify for these credits or a larger credit amount by including these payments as earned income.
Filing Amended Tax Returns
If you previously reported Medicaid waiver payments as income in prior years, you can file an amended tax return (Form 1040-X) to claim a refund for the overpaid taxes, provided that the statute of limitations for filing an amended return has not expired. To support your claim, you should include:
- The full name and, if available, the Taxpayer Identification Number (TIN) of the care recipient.
- Copies of documents proving that you and the care recipient resided in the same home during the relevant tax year (e.g., driver’s license, utility bills, official documents).
- Evidence that the care recipient was receiving care under a state Medicaid waiver program.
Social Security and Medicare Taxes (FICA)
The treatment of Medicaid waiver payments for Social Security and Medicare taxes (FICA) is separate from federal income tax exclusion. Whether these payments are subject to FICA taxes depends on your employment status:
- Agency Employee: If you are an employee of an agency that pays you under a Medicaid waiver program, these payments are generally subject to Social Security and Medicare taxes, even if they are excluded from your gross income for federal income tax purposes. The agency will withhold and report these taxes on Form W-2.
- Care Recipient Employee: If the care recipient is considered your employer, and these payments are wages for domestic service, they are generally subject to Social Security and Medicare taxes. However, exceptions exist for domestic services, such as services performed for a spouse or child, or services performed for a parent by a child under age 21. Also, if the total domestic service wages in a calendar year are below a certain threshold, they may not be subject to these taxes.
- Independent Contractor: If you are classified as an independent contractor, Medicaid waiver payments are not subject to Social Security and Medicare taxes.
Worker classification (employee vs. independent contractor) depends on who has the right to direct and control how services are performed – the agency or the care recipient. If you believe you have been misclassified, you can file Form SS-8 with the IRS to determine your employment status.
If Social Security and Medicare taxes were incorrectly withheld, you should first contact the agency that withheld the taxes to seek a refund. If the agency does not cooperate, you can file Form 843, Claim for Refund and Request for Abatement, with the IRS to claim a refund of your share of these taxes.
Guidance for Agencies Administering Medicaid Waiver Programs
Agencies that administer Medicaid waiver programs also have responsibilities related to these tax rules.
Information to Request from Care Providers
Agencies can rely on a written statement from care providers, signed under penalty of perjury, to confirm that payments are excludable under Notice 2014-7, unless the agency knows the statement is false. A sample statement is provided in the IRS guidance, affirming that the provider receives payments for caring for a named individual who lives in their home under a care plan.
Income Tax Withholding
Agencies should not withhold federal income tax from payments they reasonably believe are excludable under Notice 2014-7. Reliance on a signed statement from the care provider is permitted for this purpose.
Form W-2 Reporting for Agencies
When completing Form W-2 for employees receiving excludable payments, agencies should not include the excludable amount in Box 1 (Wages, tips, other compensation). If all payments to an employee are excludable, Box 1 should be left blank.
FICA Tax Responsibilities for Agencies
Even if payments are excludable from federal income tax, agencies are generally still required to withhold and pay Social Security and Medicare taxes on these payments if the care providers are their employees. Reportable social security and Medicare wages and withheld taxes should be included on Form W-2. However, if the agency correctly treats care providers as employees of the care recipients and fulfills employment tax responsibilities on behalf of the care recipient, the FICA tax rules for domestic service may apply, potentially leading to exemptions as described earlier.
Form 1099-NEC Reporting for Agencies
Agencies are generally required to file Form 1099-NEC for payments of $600 or more to independent contractors. However, if an agency knows that payments to a care provider are excludable under Notice 2014-7, they should not file Form 1099-NEC for these payments. Again, a signed statement from the payee can provide reasonable reliance for this determination.
Conclusion
IRS Notice 2014-7 provides essential clarification on the tax treatment of Medicaid waiver payments, offering significant tax relief to eligible individual care providers. By understanding the criteria for exclusion, proper reporting methods, and the nuances of employment and self-employment tax rules, care providers and agencies can ensure compliance and optimize their financial situations. Navigating the complexities of what program for foster care payments medicaid waiver payments entails requires careful attention to these guidelines to properly benefit from available tax exclusions and meet all tax obligations. This guide serves as a comprehensive resource to help stakeholders effectively understand and apply these important IRS regulations.
