How Taxes Work if You Have a Paid In-Home Caregiver

Stacey, an only child, was an in-home caregiver for her ailing mother for several years. She lived with her mom and cared for her while she completed college and graduate school, and even after she got married. However, after three children, one of whom has special needs, caring for her mother and her children became too much to handle for Stacey.

For years, Stacey put off her career as a physical therapist, though she vowed to go back to work when her children were all in school, at least part-time to make money for her household. She was offered a job in the field pretty quickly — one she really didn’t want to turn down. Stacey realized that she needed help with caregiving and began interviewing paid in-home caregivers to take over some of the duties during the day while she worked.

Stacey ended up hiring a caregiver named Agnes directly, rather than through an agency. Six months have passed and things are going well. Agnes inquired recently about how her income is taxed, since she has an appointment with her accountant in a couple of weeks to do her 2019 taxes. Stacey is realizing that she really isn’t sure whether Agnes is a W-2 employee or a 1099 independent contractor, since she hired her directly. This was something she should’ve researched ahead of time, but was so focused on needing the help that she didn’t think to do so.

Hiring an In-Home Caregiver

Professional in-home caregivers can be home health aides, who provide basic medical care such as managing medication and checking blood pressure, or personal care aides, who help with household chores and personal needs. People with dementia, who may be physically healthy but can’t be left alone, also can benefit from companion care.

Home health care and homemaker-type services cost roughly the same, about $25 per hour or $$73,000 per year for a 56-hour workweek in the DC area (someone who needs help 8 hours per day 7 days a week), according to the 2019 Genworth Cost of Care survey. Sometimes you’ll pay a higher rate during evenings, holidays, or weekends. Hiring a skilled care provider, such as a nurse, who can provide a higher level of care (changing a catheter or cleaning a feeding tube, for example) will cost much more, usually around double the cost of an unskilled home healthcare worker.

Taxes and In-Home Caregivers

Similar to Stacey in our example, clients often wonder if the professional in-home caregiver they hired would be a W-2 employee or a 1099 independent contractor. The answer is if an individual employee is a home caregiver, they are a W-2 employee. On the other hand, if the caregiver hires a legitimate company, then the company is required to issue W-2s to its employees.

According to the IRS, the difference between an employee and an independent contractor lies in the working relationship. Caregivers have to come to a family’s home on the days they’re told to come, work the hours they’re told to work and follow the procedures that the family feels are best to care for their loved ones. Because the family is in control of these details, they’re a household employer and their caregiver is their employee.

Here’s why you want to do this correctly: If you issue a Form 1099 to your caregiver under the false presumption that your caregiver is working as an independent contractor, he or she will have to pay twice as much in Social Security and Medicare taxes as an employee does. Household employees have 7.65% of their gross (before taxes) wages withheld and their employer pays a matching 7.65% to the IRS. Independent contractors have to pay the full 15.3% because they’re self-employed.

Additionally, if you misclassify your in-home caregiver as an independent contractor, your caregiver won’t be eligible for unemployment benefits if she loses her job due to no fault of her own. This is because the family is not paying unemployment insurance taxes to the state like they would if the caregiver were properly treated as a W-2 household employee. If your caregiver files for unemployment benefits, the state has no record of the family being an employer and will deny the claim until the family catches up on the taxes they should have been paying. If this scenario occurs, both the caregiver and the family could be audited and required to pay additional back taxes and fines.

The Right Way to Pay a Caregiver

Whether you hire a close family member or a stranger through word-of-mouth, you can ensure the best care for your parent—and protect your finances—by following these steps:

• Don’t pay under the table: Untaxed cash payments with no records can get you in trouble with the IRS and be construed as gifts, potentially disqualifying you from future Medicaid-funded in home care and/or nursing-home care, especially if these caregiver payments are made to a family member.
• Give your in-home caregiver a Form W-2: If you pay a caregiver $2,000 or more a year or $1,000 a quarter, you’ll need to Pay payroll taxes throughout the year and give your caregiver a Form W-2 at the end of the year. There are many payroll companies that will help you prepare all the necessary documents and pay all the necessary taxes. companies such as surepayroll.com, homeworksolutions.com, and many others, will take care of all the paperwork and tax filings required.
• Increase your insurance: If a professional in-home caregiver is injured in the home and sues, your homeowners’ insurance might not cover all the medical or legal costs. The resulting liability to you and your family could be financially devastating. If you are implying a W-2 employee, check with your insurer about buying workers’ compensation insurance. Workers’ compensation protects employees hurt on the job by covering medical expenses, rehabilitation costs, and lost wages. Click for more details about worker’s compensation insurance in VA, MD, or DC. If you are using a licensed home health care agency, then you should check with your insurer to consider increasing your umbrella coverage limits.

Planning for Long-Term Care in the Future

Do you have a loved one who is aging-in-place with the help of a family caregiver or a paid professional caregiver? Whether your loved one is years away from needing nursing home care or will need more care in the not so distant future, the time to plan is now. Please don’t hesitate to call us at any time to make an appointment for an initial consultation:

Elder Law Attorney Fairfax: 703-691-1888
Elder Law Attorney Fredericksburg: 540-479-1435
Elder Law Attorney Rockville: 301-519-8041
Elder Law Attorney DC: 202-587-2797