The Voice is the email newsletter of The Special Needs Alliance. This installment was written by Peter J. Losavio, Jr., CELA, an attorney with Losavio & DeJean, LLC in Baton Rouge, Louisiana. Holding both a law degree and LLM in tax, Pete is certified as an elder law attorney by the National Elder Law Foundation and as a Tax Specialist and Estate Planning and Administration Specialist by the Louisiana Board. Pete is a charter member of the Life Care Planning Law Firms Association and a member of the Society of Louisiana CPAs. He limits his practice to asset protection, life care planning and estate and tax planning.
A person hiring a caregiver must exercise care in the hiring and paying of the caregiver. This applies to any prospective employer of the caregiver, whether the employer is a family member or a trustee who will pay the caregiver from a special needs trust. Besides the practical considerations such as the caregiver’s competency and background, there are many legal pitfalls in caregiver employment.
The first matter to address is the classification of the caregiver as an employee or an independent contractor for income tax purposes. Before the employer can know how to treat payments made to the caregiver, the employer must make a critical determination as to whether the caregiver is an independent contractor or an employee.
For federal tax purposes, there is an important distinction between an independent contractor and an employee. The classification as an independent contractor or employee affects how the federal income tax, Social Security, and Medicare taxes are paid, and how caregivers file their income tax returns. In addition, the classification affects the worker’s eligibility for employer Social Security contributions and Medicare benefits.
If the caregiver is classified as an employee, then the employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay state and federal unemployment taxes on the wages paid to the caregiver.
To determine whether the employer must register and pay state unemployment tax for a caregiver, the employer can contact the appropriate state taxing authority. Internal Revenue Service Publication 926 contains contact information for the states. (https://www.irs.gov/pub/irs-pdf/p926.pdf.)
Furthermore, if the caregiver is an employee and not an independent contractor, state law may require that the caregiver be covered under workers’ compensation. In some states, the failure to provide workers’ compensation coverage is a criminal offense. If the caregiver sustains a work-related injury, then there may be liability on the part of the employer, homeowner, and person with the disability. In general, a homeowner’s insurance policy does not cover a caregiver for an employment related personal injury. For example, consider the situation where a caregiver ruptures a disc while lifting a person with a disability. The situation may not be covered by the homeowner’s insurance policy, and the employer, homeowner, and person with a disability may find that they are personally liable to the caregiver for the personal injury. This type of liability can be substantial.
The law considers many facts in deciding whether a worker is an independent contractor or an employee. The relevant facts are behavioral control, financial control, and the relationship of the parties. Facts concerning behavioral control show whether the employer has a right to direct or control how the worker does the work. A worker is an employee of a business if the business has the right to direct and control the worker. It doesn’t matter how much control the business actually exercises, just that it has the right to do so.
Facts concerning financial control determine whether there is a right to direct or control the business part of the work. Since caregivers do not have a significant investment in their work, this factor favors them being classified as employees. Also, caregivers do not have the opportunity to make a profit, indicating that they are employees.
Facts concerning the relationship of the parties illustrate how the employer and the worker perceive the relationship. If the caregiver receives benefits such as insurance, paid leave, sick leave or vacation, this would indicate that the person is an employee. If the caregiver does not receive benefits, he or she could either be an employee or independent contractor because this factor is not determinative and should not be relied on to establish independent contractor status.
As explained above, a caregiver is usually an employee when the employer has the right to direct and control the caregiver. The employer need not in fact exercise significant control, but need only have the right to do so. The caregiver is usually under the control of the employer as to when, where and how the work is to be performed. If the caregiver works exclusively for the employer, this would indicate that the caregiver is an employee. If the caregiver is not an employee of an agency, the caregiver will usually be treated as an employee.
IRS has published several rulings in which it held that caretakers were employees. Therefore, it would be very difficult to argue that a caretaker is an independent contractor. If unusual circumstances exist, a written contract would be necessary to document independent contractor status. Although not determinative, a written contract may show what the employer and the caregiver intended concerning the responsibility regarding the withholding and payment of taxes.
If the caregiver is an employee, the employer has a responsibility to withhold, remit, and pay certain taxes if the wages of the caregiver exceed a certain annual amount, currently $1700.00. The employer must withhold income tax and the caregiver’s portion of Social Security and Medicare taxes. Also, the employer is responsible for paying Social Security, Medicare, and unemployment (FUTA and SUTA) taxes on the caregiver’s wages. The employer is responsible for payment of the employee’s portion of taxes if the employer neglects to properly withhold it from the employee’s wages. If wages total $1,000.00 or more to all household employees in any calendar quarter, Schedule H must be filed by the end of the month following the close of the quarter. If the employee earns $1700.00 or more per year, the employer must give the caregiver a Form W-2, which is a wage and tax statement showing the amount of wages earned and taxes withheld from the employee’s pay. In addition, the employer is required to file copies of the W-2 with the Social Security Administration and the State Department of Revenue, if applicable.
There is a special reporting rule for hiring domestic help. The employer does not have to report payments to domestic help unless they exceed $1,700.00 per year. Income tax withholding is not required for a household employee, but the employer must withhold Social Security and Medicare taxes from the employee’s cash wages and also pay an equal amount, unless the wages are below $1,700.00. Once payments to a non-exempt employee equal or exceed $1,700.00, the entire amount, including the first $1,700.00, is subject to Social Security and Medicare taxes.
The employer can be liable for failing to file Forms W-2 and 1099. A trustee of a special needs trust may not be liable to file a Form 1099 because the trustee is not engaged in a trade or business. However, out of an abundance of caution, a trustee may want to file the Form 1099. Under the Small Business Job Act of 2010, the employer can pay penalties of up to $100 for failure to timely file a correct information return with an annual maximum penalty of $1.5 million. In addition, there is another penalty of $100 for failing to timely provide a correct payee statement, with the annual maximum penalty of $1.5 million. The employer could be liable for $250 per payee if the employer fails to timely file and timely provide each payee with a 1099 or W-2.
If the caregiver is an independent contractor and is paid $600.00 or more in one calendar year, then the employer would be required to give the caregiver a form 1099-MISC, which is a miscellaneous income reporting of what has been paid to the caregiver. The caregiver would be responsible for paying his or her own income tax and self-employment tax. The employer would not have to withhold taxes on the caregiver. However, the employer is required to file copies of the 1099-MISC with the Internal Revenue Service.
If the employer is not sure whether the caregiver is an employee or an independent contractor, the employer can obtain a Form SS-8 which determines a worker’s status for the purposes of federal employment taxes and income tax withholdings.
It is unlawful to employ a non-citizen who cannot legally work in the United States. If the employer hires a person to work on a regular basis, the employer and the employee must each complete part of the U.S. Citizenship and Immigration Services Form I-9, Employment Eligibility Verification. The employer must verify that the employee is either a U.S. Citizen or an alien who can legally work in the United States. The employer must keep the Form I-9 for his records.
In summary, if the caregiver is an employee, the employer has the responsibility to withhold income taxes, pay Social Security and Medicare taxes, pay federal and state unemployment taxes, and file various payroll forms including Form W-2. Also, the employer may be responsible for workers’ compensation coverage. The employer must also verify if the caregiver is a U.S. citizen or person who can legally work in the United States. If the caregiver is an independent contractor, the employer must file a Form 1099-MISC and be concerned with potential liability for a work-related injury. Any trustee of a special needs trust who is employing caregivers for the trust beneficiary should seek help from a tax specialist if there are any questions about compliance with these responsibilities.
Of course, this entire issue can be avoided if the caregiver is employed by an agency. For most people, any additional cost is far outweighed by the relief from the burdensome tax and reporting requirements of hiring the caregiver directly.
About this Newsletter: We hope you find this newsletter useful and informative, but it is not the same as legal counsel. A free newsletter is ultimately worth everything it costs you; you rely on it at your own risk. Good legal advice includes a review of all of the facts of your situation, including many that may at first blush seem to you not to matter. The plan it generates is sensitive to your goals and wishes while taking into account a whole panoply of laws, rules and practices, many not published. That is what The Special Needs Alliance is all about. Contact information for a member in your state may be obtained by calling toll-free (877) 572-8472, or by visiting the Special Needs Alliance online.
Frequently Asked Questions (FAQ’s)
1. IRS Rules for Caregivers
As a caregiver, managing the finances of your patient or loved one is of utmost importance. The IRS has specific rules and regulations in place for caregivers when it comes to medical expenses and taxes. For starters, if you are a household employer and pay someone to care for your loved one, you may be required to withhold and pay employment taxes. Additionally, caregivers themselves can sometimes qualify for tax deductions on medical expenses they incur while providing care. However, it’s important to note that not all medical expenses for a patient can be deducted. It’s best to consult with a tax professional to better understand what expenses are eligible for deduction. As with all tax matters, it’s crucial to keep accurate records of any expenses or income related to caregiving. While claiming these deductions can reduce taxable income, caregivers must also weigh the benefits of itemizing against taking the standard deduction for the year. Understanding the rules and regulations set forth by the IRS can help caregivers stay on top of their finances and receive any tax benefits they are entitled to.
2. Do You Have To Pay Taxes on Caregiver Wages?
Caring for someone is undoubtedly an act of love and compassion. If you’re a caregiver employee or an independent caregiver, it’s essential to know if you’re subject to pay federal taxes on your wages. The answer is yes; you’re required to pay taxes on your wages as a caregiver, just like any other employee. You’ll have to fill out a tax form and report your earnings, and the amount withheld in taxes will largely depend on how much you earn. However, there may be some tax deductions you’re eligible for, including the medical expenses of the person you care for, so make sure you keep accurate records of any expenditures. Remember, paying your taxes is necessary, but it also ensures you participate in the benefits of government programs like Social Security and Medicare.
3. Is Caregiver Income Taxable?
As a caregiver, you may be wondering if your income is taxable. The short answer is yes. Depending on your specific situation, you may have to pay both federal income taxes as well as unemployment insurance taxes. But before you start worrying about the financial implications, it’s important to understand your rights as a caregiver. You may be eligible to deduct certain living expenses related to your caregiving duties. It’s also worth exploring resources like the Special Needs Alliance, which provides support for caregivers of children with special needs. Remember, while taxes are a reality for most of us, there are options and resources available to help you through the process.
4. Can A Caregiver be an Independent Contractor?
Many individuals wonder if they can hire a caregiver as an independent contractor rather than an employee. The answer to this question is not a straightforward one. It is always wise to consult with a tax professional to determine whether this arrangement is possible and beneficial for all parties involved. Professional caregivers can receive tax credits for providing care for dependents or the elderly, but these credits may not be available if they are classified as independent contractors. Additionally, if caregivers do work as independent contractors, they will need to make their own tax payments since employers will not withhold taxes as they would for an employee. It is imperative to weigh the risks and benefits of hiring a caregiver as an independent contractor before making a decision.
5. Family Caregiver Income Tax
As a family caregiver, you may be eligible to take advantage of certain tax benefits when it comes to your personal income tax return. One option is to set up a flexible spending account, which allows you to save pre-tax dollars for eligible expenses such as medical bills and dependent care. Another possibility is to claim itemized deductions related to caregiving expenses, such as transportation costs and medical supplies. Keep in mind that if you are a self-employed caregiver, you may also be able to deduct expenses related to your business. Overall, it’s important to explore all possible avenues for maximizing your tax savings as a family caregiver.