Tax rules: Clients caring for family members or relatives

Family members who are paid to take care of a loved one may have tax responsibilities. This depends on whether they are considered an employee or provide their services as their own business. Here’s a summary of the special rules of being a family caregiver.

When a caregiver is considered an employee

A caregiver is someone who performs in-home services for elderly or disabled individuals. Generally, they are considered an employee and the person being cared for is considered the employer. This could make them responsible for employment taxes. However, there are some cases when the employer may not owe employment taxes. Some examples are when the caregiver is:

• Their spouse.
• Their child under the age of 21.
• Their parent, unless an exception applies.
• An employee who is under the age of 18 at any time during the year, unless an exception applies.

It’s important to know that even if they don’t owe employment taxes, they are still required to report the caregiver’s compensation on Form W-2. See Table 1, “Do You Need to Pay Employment Taxes” on page 5 of Publication 926, Household Employer’s Tax Guide, for more information.

When a caregiver isn’t considered an employee

Sometimes, caregivers aren’t considered employees, but they are still required to report the compensation as income on their Form 1040 or 1040-SR. They may also be required to pay self-employment tax depending on the facts and circumstances.

Here are some examples of when a family member caregiver typically wouldn’t owe a self-employment tax:

• If a family member caregiver is paid by an insurance company to take care of their spouse; the taxpayer would still be required to report the income.
• If a family member caregiver received income from a state agency to care for their grandchildren so their daughter could work; again, the taxpayer would still be required to report any income.

When self-employment tax may apply

If the caregiver is engaged in a trade or business providing care services, they would be required to pay self-employment tax.

For example, a caregiver received income from a state agency to care for their grandmother, and they operate a sole proprietorship adult day-care business for multiple clients, including their grandmother, in their home. The taxpayer would owe self-employment tax since the taxpayer is engaged in a trade or business of providing care giving services as a sole proprietor operator of an adult day care. The taxpayer must report the full amount of the payment as income on both Schedule C, Profit and Loss from Business, and Schedule SE, Self-Employment Tax.

Visit the Intuit® Tax Pro Center’s IRS Hub for continuous tax updates.