A tax expert answers our questions
Tax Issues for Elder Caregivers
by Tom Breedlove
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What does it take to be considered an elder caregiver according to the IRS?
- The IRS is involved with determining how taxes and payroll are handled for elder caregivers. In the household employment industry, elder caregivers are primarily hired directly by a family, which in most cases, results in them being considered an employee of the family. This is because the family has control over the working relationship, meaning they set the hours and the days the caregiver works and instruct the caregiver on how the job is to be performed.
What tax advantages are there for people who are considered elder caregivers?
- Elder caregivers who are classified as household employees are eligible for the same benefits that the rest of the working public enjoys. They're eligible for unemployment benefits if they are ever let go due to no fault of their own, will be able to document their wages if they ever need to apply for a loan or other line of credit, and will accumulate credit with the Social Security Administration toward their eventual retirement. And with the new healthcare laws, many elder caregivers will qualify for a federal subsidy to lower the cost of their premiums. All of this assumes the caregiver is paid legally through the set of rules outlined in IRS Publication 926.
What tax traps can you help the elderly avoid?
- If you're hiring in-home care, the caregiver will most likely be your employee. Certain home care workers can qualify as independent contractors, but you need to make sure your caregiver is classified correctly to avoid an expensive tax mistake. The Department of Labor is cracking down on worker misclassification at the moment and the household employment industry has historically been a problem child.
- Elder caregivers that are employees are classified as non-exempt workers. As such, they must be paid overtime for all hours over 40 in a seven-day work week. The rate for overtime pay must be at least 1.5 times the regular rate of pay. (Live-in employees do not have to be paid overtime, but they must be paid for every hour they work). In some situations, it's possible to offer a "salary" and include the overtime rate of pay into the salary if the family knows the elder caregiver will work the same hours every week.
- If the elder caregiver earns $1,900 or more from the family, taxes must be withheld. Specifically, the IRS requires Social Security and Medicare (FICA) taxes to be deducted and it's recommended that federal and state income taxes be withheld as well. The family will also pay a matching a portion of FICA taxes as well as federal and state unemployment insurance taxes.
Are there tax benefits that the elderly should be sure to claim?
- The following tax breaks are available to elderly employers paying for care for themselves or for their spouse.
- Medical Care Tax Break: Employers may take an itemized deduction for qualifying medical expenses (done via Schedule A on Form 1040) that are more than 7.5% of their adjusted gross income (10% of AGI if the employer is under the age of 65). Qualifying medical expenses include those prescribed by a licensed healthcare practitioner that are necessary, preventative, therapeutic, treating, rehabilitative services, and maintenance and personal care services. Wages paid for nursing services may also be included, even if they were not performed by a registered nurse.
For medical care tax deduction purposes, the itemized expenses cannot include the cost of general household services (i.e. housekeeping), even if the help is recommended by a doctor.
- Dependent Care Tax Breaks: The employer can elect to enroll in a Dependent Care Account (FSA) to pay for up to $5,000 of dependent care expenses using pre-tax dollars. This will save the average family about $2,000-$2,300 per year. If the family doesn't have access to a Dependent Care Account through their job, they can take advantage of the Dependent Care Tax Credit (Form 2441). This allows the family to itemize up to $3,000 of dependent care expenses per year per dependent ($6,000 maximum per year). The tax credit percentage is contingent upon income, but most families will receive a tax credit of 20% on those itemized expenses, yielding up to $600 per year for one dependent or $1,200 per year for two or more dependents.
- In order to capitalize on dependent care tax breaks, families must pass the "work-related test," meaning both spouses must be employed or full-time students. Most elderly employers will not pass this test because they are generally retired by the time care is needed.
- As with any tax rules and regulations, there are numerous exceptions, exemptions, and nuances. When calculating tax breaks for eldercare, it's strongly recommended that families seek professional guidance from a personal income tax specialist.
Tom Breedlove is the household tax expert and Business Development Director at Care.com HomePay.
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