Getting Paid as a Family Caregiver: The Tax Rule Neither Checker Covers
Pay from a Medicaid waiver program for caring for a relative can be free of federal income tax. It depends on one condition: whether you live in the same home as the person you care for.
Payments from a state Medicaid Home and Community-Based Services waiver program for caring for a family member can be excluded from federal taxable income. The rule is IRS Notice 2014-7, which treats them as "difficulty of care" payments. The condition is that the caregiver lives in the same home as the person receiving care. The excluded pay can still count as earned income for the Earned Income Tax Credit if you choose. If it is paid as wages with Social Security and Medicare tax withheld, it still earns Social Security work credits.
Our Paid Family Caregiver Eligibility Checker and Family Caregiver Support Checker cover whether you can be paid through a state Medicaid program. This article covers how that pay is taxed.
The exclusion: difficulty of care payments under IRS Notice 2014-7
Under IRS Notice 2014-7, certain payments to an individual care provider under a state Medicaid HCBS waiver are treated as difficulty of care payments. Those are excluded from gross income under Internal Revenue Code Section 131. If you qualify, the pay is not federal taxable income.
What decides it is where you live. The IRS counts the home as yours if you reside there and carry on the routines of daily life there, such as sharing meals and holidays with family. Providing care at an address does not make it your home.
The IRS gives two examples:
- A daughter moves into her mother's home to care for her and lives there. She generally qualifies for the exclusion.
- A son works at his father's home several days a week but keeps his own residence and spends weekends and holidays there. He generally does not qualify.
The number of hours of care does not matter for this test. A caregiver working 20 hours a week who lives in the home can qualify. One working 50 hours who lives elsewhere does not.
Qualifies for Exclusion
Caregiver moved into the care recipient's home and lives there, sharing meals, holidays and daily life.
Does Not Qualify
Caregiver works at the recipient's home several days a week but maintains a separate primary residence elsewhere.
Excluded from taxable income, but it can still count where it helps
Earned Income Tax Credit. You may choose to count the excluded payments as earned income when you work out the EITC, if they would otherwise be earned income such as wages. The choice is all or nothing: you include all of the payments or none. Work out the credit both ways and use the larger result. Our EITC estimator can help with the comparison.
Social Security credits. If the payments are paid as wages with Social Security and Medicare (FICA) tax withheld, they generally count toward your Social Security work credits and future benefit, even though they are free of federal income tax. Look at your pay stub or W-2 for FICA withholding to confirm.
Reporting it on your return
Nontaxable Medicaid waiver payments may appear on your Form W-2 in box 12 with code II. If the payments were included in your taxable wages, you report them on Form 1040 and then subtract them as a negative entry on Schedule 1, following the instructions for that tax year.
The reporting steps have changed from year to year and depend on how your state program pays you. Use the current year's IRS instructions or a tax preparer. If you paid tax on these payments in an earlier year when you could have excluded them, ask a preparer about filing an amended return. Refund claims generally have to be made within three years.
Keep proof that you lived in the home: a lease or utility bill, your driver's license address and mail. State income tax rules can differ from the federal rule, so check your state's treatment as well.
Frequently Asked Questions
Are Medicaid family caregiver payments taxable?
Often not. Under IRS Notice 2014-7, payments from a state Medicaid Home and Community-Based Services waiver program for caring for someone in the provider's own home are treated as difficulty of care payments. They are excluded from federal gross income under Internal Revenue Code Section 131.
What counts as the provider's home for this exclusion?
The place where the caregiver lives and carries on daily life, such as sharing meals and holidays with family. A caregiver who moved into a parent's home to provide care generally qualifies. A caregiver who works at the care recipient's home several days a week but keeps a separate primary residence generally does not.
If the payments are excluded from income, do they still count as earned income for the Earned Income Tax Credit?
They can. A caregiver may choose to include all of the excluded payments, not part, as earned income when calculating the Earned Income Tax Credit, if the payments would otherwise be earned income such as wages.
Do excluded Medicaid waiver payments still count toward Social Security work credits?
If the payments are treated as wages subject to Social Security and Medicare (FICA) taxes, they generally count toward Social Security work credits and future benefits, even though they are excluded from federal income tax.
How does a caregiver report the exclusion on a tax return?
Nontaxable Medicaid waiver payments may appear on Form W-2 in box 12 with code II. If the amount was included in taxable wages, it is generally reported on Form 1040 and then subtracted as a negative entry on Schedule 1, following the IRS instructions for that tax year.
This article explains the general federal tax treatment of Medicaid waiver difficulty of care payments as of October 2026. Whether your arrangement qualifies, and the exact reporting steps, depend on your facts and the IRS instructions for the tax year. This is general educational information, not tax advice. Consult a qualified tax preparer about your own return.