Do private caregivers need to report wages? Usually, private caregivers must be paid through official channels, so payroll taxes and unemployment insurance are addressed. Private caregivers must file taxes if they do not work for an agency. Employers must pay taxes and provide documentation to the IRS if they pay a caregiver more than $2,600 annually.
Ahead, what are the rules for caregivers?
For tax purposes, someone is considered a household employee if you determine their work in and around your home and how it is done. However, unlike household employees, self-employed individuals and independent contractors decide how they do their job and provide their equipment and supplies. Most independent caregivers are not independent contractors.
Unless they are your parent, spouse, child (below 21 years old), or an employee younger than 18, private caregivers are classified as household employees.
Family members may or may not provide caregiving services. If the employee is a family member, the employer may not owe employment taxes though they still need to report the caregiver's compensation on a W2. Learn more in the IRS' Household Employer's Tax Guide.
In some cases, family caregivers are not employees but must still report the compensation as income of Form 1040 and may still need to pay self-employment tax, depending.
Paying family caregivers cash wages under the table is illegal and may result in stiff penalties for tax evasion. Both paid family caregivers and the employer must pay taxes and report to the IRS. Who qualifies as a household employee?
An older adult may need to realize that they must file taxes for a caregiver employee, which seems complicated. Or perhaps the caregiver and their employer want to avoid reporting their taxes to evade them. Or even still, the caregiver may be undocumented.
Understanding the IRS rules for caregivers and employers will help individuals avoid tax penalties.
The care industry has a large population of undocumented caregivers. They not only care for the elderly or disabled but often serve as nannies, tutors, babysitters, and housekeepers. The immigration process in the US takes years. Because of this, visas usually expire, or paperwork problems may result in a person being undocumented. Understandably, in these situations, older adults and their caregivers may want to avoid reporting to the IRS.
However, the IRS does require individuals to report all wages paid or received. One option may be for the undocumented worker to receive an Individual Taxpayer Identification Number (ITIN). This number can be used in filing taxes; a social security number is not required for an ITIN. The ITIN allows domestic workers to file taxes, open bank accounts, or apply for a mortgage. Some of these things can help with the green card or citizenship process, and employers can issue a W2 with the ITIN. The ITIN also means that when the caregiver attains citizenship, all prior wages will be applied to their future social security benefits.
As of 2022, the IRS cannot report immigration status to Immigration and Customs Enforcement. Undocumented workers who do not report their taxable income may face denial of their immigration petition. Speaking with a reputable immigration attorney familiar with the tax code can help households navigate these tricky rules.
When is a family caregiver considered a household employee? A family caregiver will only be considered an employee for tax purposes if they perform tasks of significant benefit to the family and are paid wages in return. In some cases, spouses, children under 21, and parents are exempt from taxes. However, only a certified tax preparer will know if the caregiver will qualify under this exemption. Some example scenarios:
The IRS rules for caregivers change every year. While there has been a move to simplify the IRS tax code, the rules still need to be clarified and more transparent. What are some of the upcoming changes?
In 2023, the IRS will release new guidelines for caregivers providing care for family members. These rules will allow paid caregivers to claim deductions for expenses associated with delivering care, like respite care costs and travel expenses related to taking a family member to doctor's visits. In addition, caregiver spouses may be able to claim a portion of the earned income credit.
Both family caregivers and older adults face steep risks if they pay a caregiver under the table to avoid payroll taxes. Evading taxes has several severe penalties, from fines to incarceration. Additionally, the senior may face lawsuits or even lose Medicare benefits.
Older adults may be sued if the caregiver hurts themselves while in the senior's home. Workman's compensation offers some coverage for injuries in the house. Without protections, the senior may have to pay for medical bills, restitution of wages, and more.
Both the caregiver and the employer can receive penalties for owing taxes to the IRS. This includes federal and state taxes, and they may be liable for back taxes and additional interest for taxes owed. In the most egregious cases, individuals may face incarceration, and IRS penalties can easily result in thousands of dollars in fines.
Medicaid reviews the last five years of income when determining eligibility. If you pay a family caregiver without filing taxes, it may be considered a gift. This might affect a senior's eligibility under Medicaid and result in losing benefits.
If you're one of the few randomly selected for an IRS tax return audit, the IRS will discover you employed a caregiver in your home but did not pay taxes as a household employer and did not withhold taxes from them.
When paying caregivers under the table, you cannot provide them with the appropriate tax form to file their returns. Those who do not have a W2 to file their taxes can use a From 4852 as a substitute, which asks them for information about their employers.
If the caregiver feels their pay has been incorrect or unfair, they may file a wage dispute with the state or the Department of Labor. The caseworker will need to see documentation to back up the claims.
According to the IRS, if a private caregiver is paid more than $2,400 per year, they are considered a household employee. In this instance, the family hiring the private caregiver takes on the responsibilities of being an employer, including payroll and taxes.
It is crucial to determine the level of care that the care recipient needs to write a detailed job description, including how many hours and days per week care is needed, and any special skills or training required.
To determine the pay rate for private caregivers, consider federal law and local market pricing. Families can expect to pay private caregivers between $10 – $20 per hour, depending on their location. The Fair Labor Standards Act (FLSA) is a federal law that sets the minimum wage and requires overtime pay for those who work over 40 hours per week.
Once you've found the right caregiver for your loved one, complete a background check and create a written employment contract that includes the start date, role and responsibilities, compensation, and benefits.
1. Get an EIN (Employer Identification Number;)
2. Register with your state revenue department to get a state tax identification number
3. Get Worker's Compensation Insurance / Disability Insurance
4. File a USCIS Form I-9: Employment Eligibility Verification
5. Complete a Form W-4: Employee’s Withholding Allowance Certificate
7. Report your new hire to the state (State new hire reporting websites here.)
No one likes to pay taxes. The news is full of celebrities and politicians who have avoided paying taxes for decades. Some face fines and incarceration, while others never do. However, most older adults and family caregivers cannot afford the hefty consequences of not paying federal taxes. Thousands of dollars in back taxes, interest, and penalties can seriously harm someone financially.
The tax code is complicated. Understandably, thinking of a part-time caregiver as an employee can seem confusing. And when the caregiver is family, the IRS rules for caregivers get even more confusing. Sit down with a financial advisor or certified accountant for legal advice on how to best pay wages and file your taxes with confidence using Givers Taxes. Avoid the heavy risks of tax evasion.
