Posted by Dennis Jao

A Guide to Understanding Family Caregivers and Self-Employment Taxes

A Guide to Understanding Family Caregivers and Self-Employment Taxes

Caregivers, workers who perform in-home services, for disabled individuals and the elderly work under special tax rules. When a caregiver is employed, it is seen that he/she works for the disabled individual or the elderly who have the right to provide the caregivers with instruction about what needs to be done. Because the services of a caregiver may be executed by a family member, the employer, the disabled or the elderly, doesn’t have to pay employment taxes. The employer, however, must report the amount the caregiver earns on a Form W-2. 

In other cases, however, the caregivers are not employees; if this is the issue, the caregiver is required by law to report all earnings as income on their Form 1040. When this is done, the caregiver must pay self-employment taxes based on the information provided and the circumstances surrounding this information. 

For a better understanding into taxes concerning family members who care for the elderly or disabled but are not employees, read below:

Tax as it Relates to the Care of a Disabled Spouse

If you, a taxpayer, are the sole caregiver for your spouse and report a 1099-MISC, income received from an insurance company, you don’t have to pay taxes from this income received. You will only be required to pay self-employment tax if you conduct other business or trade offering caregiving services.

Tax as it Relates to Relatives Caring for Family Member’s Children

If a family member, for example grandparents, receives income from a state agency because they care for their grandchildren while their parents work, the individual is not required to pay self-employment tax on the income received; unless the individual is offering a business or trade providing daycare services to other families. You must, however, report the full amount received when completing your Form 1040, Other Income, on line 27. 

Paying Taxes as a Sole Proprietorship Caregiver

If the taxpayer operates a sole proprietorship adult day care business while taking care of an elderly or disabled family member, the taxpayer must pay self-employment taxes since they are operating a business or trade providing caregiving services to non-family members. 

In a situation such as this, the taxpayer must report the full amount earned on the Schedule SE and Schedule C forms. 

Who is the Employer?

Although the IRS describes the employer as the elderly person, disabled individual or their spouse giving instructions, an adult child or the person responsible for the disabled individual is the employer if the person requiring care cannot verbally or otherwise communicate their needs. For example, if an elderly individual resides in the home of their adult child because they are no longer able to live on their own, the adult child is the employer. The same goes for disabled children who must reside with their parents because they cannot function on their own. 

Know Your Obligations as an Employer

If you pay your caregiver over $1,900 for the year, you must meet what is known as “Household Employer Tax Obligations” or the “Nanny Tax” as it is sometimes referred to, even in the case of the elderly. 

As the Employer, you have eight different obligations to meet:

  1. Federal and state household employer tax ID - the IRS will provide you with an Employer Identification Number, EIN as well as a state ID from the tax agency in your state. 

  2. To calculate and withhold taxes on behalf of your caregiver - As a household employer, it is your duty to withhold Social Security and Medicare taxes for your caregiver. 

  3. Track all taxes as it relates to your caregiver - One of your household employer duties is to keep track of all FICA, federal and state unemployment insurance taxes. Each state has different tax laws and rules; therefore, the state you live in may require that you report other small taxes.

  4. You must file estimated tax payments quarterly - Form 1040-ES must be used to report your FICA and withheld federal income taxes. 

  5. File all state tax returns - As a caregiver’s employer, you must file state tax returns each quarter. When filing these taxes, you must send in all income withheld, as well as, unemployment taxes.

  6. You must prepare your caregiver’s Form W-2 - at the end of the tax year, you must give your caregiver a Form W-2 in order for them to file their tax returns. 

  7. File Forms W-3 and W-2 Copy A - you must file with the Social Security office, Form W-3 and W-2 Copy A along with an annual reconciliation form. 

  8. Prepare Schedule H Form - this is the form you will need to file your own taxes at the end of the year. 

Very few people enjoy the hassle of filing their own taxes and if you would like help filing your business or household taxes, Dennis Jao is available for consultation and filing services. 

FOR MORE INFORMATION OR HOW ELSE WE CAN HELP YOU, PLEASE CLICK ON THE BLUE TAB BELOW.

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Dennis Jao
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