Family Caregivers And Self-Employment Tax

In Some Cases, Caregivers
Are Not Employees

For the month of October, the IRS ran a series of articles highlighting paid family and medical leave as well as other related topics to celebrate National Work and Family Month.

We decided to take a different approach and write about tax situations that may arise when hiring help to care for a family member. Last week’s article, Tax Situations When Caring For A Family Member, covered the role of the taxpayer as the employer when hiring in-home help to care for children and dependents in the home.

This week, we are covering the role of family caregivers as self-employed individuals.

Special Rules Apply

Special rules apply to workers (caregivers) who perform in-home services for elderly or disabled individuals. Caregivers are typically employees of the individuals for whom they provide services because they work in the homes of the elderly or disabled individuals, and these individuals have the right to tell the caregivers what needs to be done.

These services may or may not be provided by a family member.

If the caregiver employee is a family member, the employer may not owe employment taxes even though the employer needs to report the caregiver’s compensation on a Form W-2.

However, in some cases, the caregivers are not employees. In such cases, the caregiver must still report the compensation as income on his or her Form 1040 and may also be required to pay self-employment tax depending on the facts and circumstances.

Frequently Asked Questions

The following FAQs illustrate some fact patterns involving family member caregivers who are not employees:

Q 1: Must a taxpayer pay self-employment tax on the income she received from an insurance company to care for her spouse who was injured in an accident and permanently disabled?

The taxpayer is caring for her spouse in their home in an effort to avoid moving him to a nursing facility and also to reduce caregiving costs.
The spouse requires assistance with dressing, bathing, eating, etc.; the taxpayer also administers medication and helps with basic physical therapy.
The taxpayer is neither a trained nurse nor a therapist and doesn’t provide such services to anyone other than her spouse.
The taxpayer received Form 1099-MISC from the insurance company with the amount paid shown in Box 7 as nonemployee compensation.

A 1: No, the taxpayer does not owe self-employment tax on amounts reported on the 1099-MISC she received from the insurance company if she is not engaged in a trade or business of providing caregiving services, as appears to be the case in this situation. The taxpayer must report the full amount of the payment on line 21, Other Income, of Form 1040.

Q 2: Must a taxpayer pay self-employment tax on the income received from a state agency to care for his grandchildren so his daughter can work?

The taxpayer does not have a daycare business or look after any other children.
The taxpayer receives Form 1099-MISC from the state agency with the amount paid shown in Box 7 as nonemployee compensation.

A 2: No, the taxpayer does not owe self-employment tax on amounts reported on the 1099-MISC he received from the state agency if he is not engaged in a trade or business of providing daycare services, as appears to be the case in this situation. The taxpayer must report the full amount of the payment on line 21, Other Income, of Form 1040.

Q 3: Must a taxpayer pay self-employment tax on the income received from a state agency to care for her grandmother if the taxpayer operates a sole proprietorship adult daycare business for multiple clients, including her grandmother, in her home?

The state agency pays for the care so that the grandmother need not be institutionalized.
The taxpayer receives Form 1099-MISC from the state agency with the amount paid shown in Box 7 as nonemployee compensation.

A 3: Yes, the taxpayer owes self-employment tax since the taxpayer is engaged in a trade or business of providing caregiving services as a sole proprietor operator of an adult daycare. The taxpayer must report the full amount of the payment as income on both Schedule C and Schedule SE.

Publication 926, Household Employer’s Tax Guide may help you decide whether you have a household employee and, if you do, whether you need to pay federal employment taxes (social security tax, Medicare tax, FUTA, and federal income tax withholding).

If you are a self-employed caregiver, visit the Self-Employed Individuals Tax Center to better understand your tax obligations.

Please contact your tax professional for assistance in sorting out your tax situation if you are providing care for a family member or other elderly or disabled individual.