It is increasingly common for an aging parent or other family member to remain at home with the help of a son, daughter, grandchild, or other relative. In many families, that caregiver eventually begins receiving payment for the time and assistance being provided.
A properly structured caregiver arrangement can be an important part of an elder-law and long-term-care plan. But there is another issue families sometimes overlook:
Payments to a family caregiver can have tax consequences.
The fact that the caregiver is a family member does not automatically make the payments tax-free.
Is the Family Caregiver an Employee?
According to the IRS, a person who provides in-home services for an elderly or disabled individual will generally be considered a household employee when the person receiving the care has the right to control not only what work is performed, but how that work is performed.
This can occur even when the caregiver is a son, daughter, grandchild, sibling, or other relative.
If the caregiver is a household employee, the person receiving the care may be considered a household employer and may have employment-tax and reporting responsibilities.
There are special exceptions involving certain family relationships. For example, different employment-tax rules may apply when the caregiver is the person’s spouse, parent, child under age 21, or, in certain circumstances, an employee under age 18.
The precise rules matter because an exception from a particular employment tax does not necessarily mean that the payment can simply be ignored for tax-reporting purposes.
What if the Caregiver Is Not an Employee?
Not every family caregiver is a household employee.
Depending upon who is paying for the care, how the arrangement is structured, and the circumstances under which the services are provided, the caregiver may instead receive compensation that must be reported on the caregiver’s individual income-tax return.
Whether those payments are also subject to self-employment tax is a separate question.
For example, a family member who simply receives payments for caring for one relative is not necessarily operating a caregiving business.
On the other hand, if someone operates a business providing caregiving or adult day-care services to multiple clients, including a family member, the payments may constitute business income reportable on Schedule C and may also be subject to self-employment tax.
A Caregiver Agreement Does Not Make the Payments Tax-Free
This distinction is particularly important in elder-law planning.
We frequently recommend that families document legitimate caregiving arrangements in writing, particularly when an elderly or disabled person is compensating a child or another relative for substantial services.
A written caregiver agreement can help establish:
- What services are being provided;
- How much the caregiver will be paid;
- How often payment will occur;
- The expected hours or level of care;
- The parties’ respective responsibilities; and
- That payments are compensation for actual services rather than unexplained transfers or gifts.
That documentation can be very important for estate planning, Medicaid planning, probate and trust administration, and disputes among family members.
But a caregiver agreement does not determine the federal tax treatment of the payments.
The tax consequences still depend upon the actual relationship between the parties and the applicable IRS rules.
Why This Matters Beyond Taxes
Poorly documented caregiver payments can create problems long after the payments are made.
If a parent pays one child thousands of dollars for caregiving while other children receive nothing, questions may later arise:
Was this compensation or a gift?
Was there actually an agreement?
Were services really performed?
Was the amount reasonable?
Were the payments properly reported for tax purposes?
If the parent later needs Medicaid-funded long-term care, how will those payments be characterized?
And after the parent’s death, unexplained transfers to one child can become a significant source of disagreement during probate or trust administration.
This is why the legal and tax aspects of a caregiver arrangement should be considered before substantial payments begin, rather than trying to reconstruct the arrangement years later.
Before Paying a Family Caregiver
Families considering a paid caregiving arrangement should speak with their elder-law attorney and tax professional about how the arrangement should be structured.
The legal documents and the tax treatment need to work together.
A carefully prepared caregiver agreement can document the services and protect the family, but the family should also determine whether the caregiver will be treated as a household employee, whether employment taxes apply, what tax reporting is required, and whether the caregiver may instead be receiving income from a trade or business.
Paying a family member for legitimate caregiving services can be entirely appropriate. The important thing is to structure and document the arrangement correctly from the beginning.
This article is intended for general educational purposes and is not individual legal or tax advice. Tax treatment depends upon the particular facts and circumstances. Families should consult their attorney and tax professional regarding their individual situation.
