- Learn how nursing homes qualify as medical deductions.
- Find out if meals and lodging are deductible.
- Discover the deductible vs non-deductible qualifications for home care and nursing services.
- Learn about the tax implications of caregivers employed by agencies vs. household employees.
Because people are living longer now than ever before, many individuals are serving as care providers for loved ones (such as parents or spouses) who cannot live independently. Such individuals often have questions regarding the tax ramifications associated with the cost of this care. For these individuals, the cost of eldercare may qualify for a deduction as a medical expense.
Incapable of Self-Care
The cost of caring for another person qualifies as a deductible medical expense when the person cared for is incapable of self-care. A person is considered incapable of self-care if, as a result of a physical or mental defect, that person is incapable of fulfilling his or her own hygiene or nutritional needs, or if that person requires full-time care to ensure his or her own safety or the safety of others.
Generally, the entire cost of care at a nursing home, home for the aged, or assisted-living facility is deductible as a medical expense, provided that the person who lives at the facility is primarily there for medical care or is incapable of self-care. Helpfully, this includes the entire cost of meals and lodging at the facility. On the other hand, if the person is living at the facility primarily for personal reasons, then only the expenses that are directly related to medical care are deductible. The cost of meals and lodging is not a deductible medical expense for eldercare.
A common alternative to nursing homes is in-home care. In this case, day helpers or live-in caregivers provide care within the home. The services that these caregivers provide must be allocated into (nondeductible) household chores and (deductible) nursing services. These nursing services need not actually be provided by a nurse. If these services would normally be provided by a nurse (e.g., administering medication, bathing, feeding, and dressing), they qualify as a medical deduction for eldercare. If caregivers also provide general housekeeping services, then the portion of their pay that is attributable to household chores is not deductible.
The emotional and financial aspects of caring for a loved one can be overwhelming. As a result, caregivers often overlook their burdensome tax and labor-law obligations. Sadly, these laws provide for no special relief from these tasks.
Is the Caregiver an Employee?
Because of the way that labor laws are written, it is important to figure out if an in-home caregiver is an employee. The answer to this question can be very subjective. Caregivers’ services can be obtained in a number of ways:
- Agency-provided caregivers are employees of the agency, which handles all the responsibilities of an employer. So, loved ones do not have any employment tax or payroll-reporting responsibilities. However, such caregivers generally come at a substantially higher cost than others, which may be prohibitive when considering eldercare.
- Self-employed caregivers pay all their expenses. They are responsible for their own income reporting and taxes and are not considered employees under federal or state law. The IRS lists 20 factors that it uses to determine whether an individual is an employee. The main factors are financial control, behavioral control, and the relationship between the parties. Household workers are typically classified as employees.
- Household employees are subject to Social Security and Medicare taxes. The employer is thus responsible for withholding the employee’s share of these taxes and paying the employer’s share of payroll taxes. Fortunately for these employers, the special rules for household employees greatly simplify the payroll-withholding and income-reporting requirements. Any resulting federal payroll taxes are paid annually in conjunction with the employer’s individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to do so. However, the employer is still required to issue a W-2 to the employee and to file that form with the federal government. The employer also must obtain federal and state employer ID numbers for reporting purposes. Some states have special provisions for the annual reporting and payment of state payroll taxes; these may be similar to the federal requirements.
The employer’s portion of all employment taxes (Social Security, Medicare, and both federal and state unemployment taxes) related to medical expense deductions are also deductible as a medical expense.
If you have questions about whether or not your caregiver is an employee, call Fiducial. We'll be happy to sit down with you and discuss the situation.
Tax reporting for household employees
You may be thinking, “Wait a minute – the household employers I know pay in cash and do not pay payroll taxes or issue W-2s to their household employees.” Maybe you're thinking this sounds a lot less complicated than the options outlined above. This observation may be accurate, but such behavior is illegal, and it is not right to ignore the law. Think about what could happen if one of your household employees is injured on your property. What if you dismiss such an employee under less-than-amicable circumstances? In such circumstances, the household employee will often be eager to report you to the state labor board or to file for unemployment compensation. You don't need the stress of this situation on top of the stress of eldercare. Fiducial vehemently recommends against this practice.
Note, however, that gardeners, pool cleaners, and repair people generally work on their own schedules, invest in their own equipment, have special skills, manage their own businesses, and bear the responsibility for any profit or loss. Such workers are not considered household employees.
Here are some additional issues to consider:
Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in a given week. However, live-in employees are an exception to this rule in most states.
Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.
Separate Payrolls – Business owners may be tempted to include their household employees on their companies’ payrolls. However, any payments to household employees are personal expenses and thus are not allowable as business deductions. So, business owners must maintain separate payrolls for household employees; in other words, personal funds (not business funds) must be used to pay household workers.
Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When a household employee is hired to work on a regular basis, the employer and employee each must complete Form I-9 (Employment Eligibility Verification). The employer must carefully examine the employee’s documents to establish his or her identity and employment eligibility.
If you have questions related to eldercare or about how your state deals with related employment issues – or if you would like assistance in setting up a household payroll system – call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!