Getting Paid as a Family Caregiver: The Tax Rule Neither Checker Covers
Whether you can get paid to care for a family member is one question. Whether the IRS taxes that pay is a completely different one, with an answer that surprises almost everyone who qualifies.
Payments received under a state Medicaid Home and Community-Based Services waiver program for caring for a family member can be excluded entirely from federal taxable income, under IRS Notice 2014-7's difficulty of care payment exclusion. The condition that decides it: the caregiver has to actually live in the same home as the person receiving care, not merely work there. Even when excluded from taxable income, the payments can still be counted as earned income for the Earned Income Tax Credit, and if paid as wages subject to Social Security and Medicare tax, they still build Social Security work credits.
This site's Paid Family Caregiver Eligibility Checker and Family Caregiver Support Checker both cover whether and how a caregiver can get paid through state Medicaid programs. Neither gets into what happens to that money once it's received, and the tax treatment turns out to be one of the most financially significant, least understood parts of the whole picture.
The exclusion: difficulty of care payments under IRS Notice 2014-7
Under IRS Notice 2014-7, the IRS treats certain payments made to an individual care provider under a state Medicaid Home and Community-Based Services waiver program as difficulty of care payments, excludable from gross income under Internal Revenue Code Section 131. In plain terms: money paid to a family member for providing Medicaid-funded personal care can, in the right circumstances, not be federal taxable income at all.
The condition that actually decides eligibility for the exclusion is where the caregiver lives, not just where they work. The IRS defines the qualifying home as the place where the caregiver actually resides and carries out the routines of daily life, shared meals and holidays with family, not simply a location where care happens to be provided. The IRS's own guidance draws the line with two clear examples: a caregiver who moved into a parent's home specifically to provide care generally qualifies for the exclusion, while a caregiver who works at the care recipient's home several days a week but maintains a separate primary residence, spending weekends and holidays there instead, generally does not. The distinction is genuinely about where someone lives, not simply how many hours they spend providing care.
Qualifies for Exclusion
Caregiver moved into the care recipient's home and actually lives there — shared meals, holidays, daily life.
Does Not Qualify
Caregiver works at the recipient's home several days a week but maintains a separate primary residence elsewhere.
Excluded from taxable income, but it can still count where it helps
Excluding these payments from gross income doesn't mean they disappear from every calculation that matters. Two specific carve-outs work in the caregiver's favor. First, a caregiver may choose to include all, not part, of the excluded payments as earned income when calculating the Earned Income Tax Credit, if the payments would otherwise have qualified as earned income such as wages — meaning the exclusion doesn't have to cost a caregiver access to the EITC if including the income would actually produce a larger credit. Second, if the payments are structured and paid as wages subject to Social Security and Medicare (FICA) withholding, they generally still count toward Social Security work credits and future benefit calculations, even though the same dollars are excluded from federal income tax. For a caregiver worried that tax-free pay might mean the years don't count toward their own eventual Social Security benefit, that concern usually doesn't hold up, provided the payments were actually run through payroll as wages.
Reporting mechanics have also evolved: nontaxable Medicaid waiver payments may now appear on a caregiver's Form W-2 in box 12 with code II, then get backed out as a negative entry when filing, following the specific line instructions for the current tax year. Because the exact reporting steps change from year to year and depend on how the payments were structured by the state program, this is one area worth handling with current-year IRS instructions or a tax preparer in hand, rather than working from a prior year's memory of the process.
Frequently Asked Questions
Are Medicaid family caregiver payments taxable?
Often not. Under IRS Notice 2014-7, payments received under a state Medicaid Home and Community-Based Services waiver program for caring for someone in the provider's own home are treated as difficulty of care payments, excludable from federal gross income under Internal Revenue Code Section 131.
What counts as the provider's home for this exclusion?
The place where the caregiver actually lives and carries out the routines of daily life, such as shared meals and holidays with family, not merely a location where they work. A caregiver who moved into a parent's home to provide care generally qualifies. A caregiver who works at the care recipient's home several days a week but maintains a separate primary residence generally does not.
If the payments are excluded from income, do they still count as earned income for the Earned Income Tax Credit?
They can. A caregiver may choose to include all, not part, of these excluded payments as earned income when calculating the Earned Income Tax Credit, if the payments would otherwise qualify as earned income such as wages.
Do excluded Medicaid waiver payments still count toward Social Security work credits?
If the payments are treated as wages subject to Social Security and Medicare (FICA) taxes, they generally still count toward Social Security work credits and future benefit calculations, even though they are excluded from federal income tax.
How does a caregiver report the exclusion on a tax return?
As of recent tax years, nontaxable Medicaid waiver payments may appear on a Form W-2 in box 12 with code II. The amount is generally reported on Form 1040, then backed out as a negative entry on Schedule 1, following current IRS instructions for the applicable tax year.
This article explains the general federal tax treatment of Medicaid waiver difficulty of care payments as of August 2026. Whether a specific arrangement qualifies for the exclusion, and the exact reporting steps, depend on individual facts and the current tax year's IRS instructions. This is general educational information, not tax advice — consult a qualified tax preparer for your specific situation.