December 1, 2022 2:01 am

In-Home Care Payments May Be Subject to Self-Employment Tax

Relatives may receive Medicaid payments for the care of a disabled child in the caregiver’s home. Previously, the IRS said such payments are treated for income tax purposes as “difficulty of care payments”, which are excludable from gross income (Notice 2014-7). They are not subject to income tax withholding or taxable for income tax purposes. However, the IRS recently said such payments may still be subject to FICA and FUTA tax treatment (ECC 202243009). There is no specific exemption from these taxes for difficulty of care payments. Fortunately, however, a parent who receives these payments is still not subject to FICA tax under a specific statutory exclusion. Other caregivers, however, are now subject to FICA treatment despite exemption from income tax; there is no FICA “opt out” alternative.

Tax Glossary

Installment sale

A sale of property that allows for tax deferment if at least one payment is received after the end of the tax year in which the sale occurs. The installment method does not apply to year-end sales of publicly traded securities. Dealers may not use the installment method. Investors with very large installment balances could face a special tax.

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