Tax Issues Regarding Payment to Caregivers

Most of our clients want to remain in their home for as long as possible, however, many fail to realize that in-home care is often more expensive than care received in community settings. The 2020 Genworth Cost of Care Survey identifies that, for the Virginia Beach area, the median rate of home health services is $20 an hour, which would equate to $14,400 for around-the-clock care per month, while the median rate for a private room in an assisted-living facility was estimated to be $4,365 per month and a semi-private room in a nursing home was estimated to be $7,665 per month. While these rates are shocking for many of our clients, as a practitioner I see that these rates actually underestimate the real cost of care in Hampton Roads. As a result, absent good planning, the ability to finance care inside an individual’s residence may be short-lived, cause reduction in necessary services, or require the family to supplement care, either financially or through services provided by the family.

One solution for families is to utilize independent caregivers, in lieu of a care agent, who will provide services at a reduced rate. While there are a number of risks involved with this approach, this article is only intended to focus on the obligations of the employer from a tax and public benefits perspective. The additional costs and headaches associated with being an employer can offset the perceived advantages of independent caregivers.

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An independent caregiver is considered by the Internal Revenue Service (IRS) to be a household employee. The IRS requires that if an independent caregiver is paid more than $2,200 per year that they be treated as a household employee and not as an independent contractor. This requires the family hiring the independent caregiver to take on the usual responsibilities of an employer, including payroll and taxes.

There are preliminary actions that should be taken by an employer prior to the employee’s start date. This includes obtaining an Employer Identification Number from the IRS and registering as an employer with the Commonwealth of Virginia to get a state tax identification number.  The employer should, but is not required to, also obtain Workers Compensation Insurance to protect against a work-related injury. The employer will also need to obtain a USCIS Form I-9, to ensure one is eligible for employment, an IRS Form W-4 to determine how much federal income tax is to be withheld from an employee’s paycheck, and a State W-4, to determine how much state income tax is to be deducted from one’s payroll.

Once an independent caregiver has been hired, the employer must report the employee’s earnings and withhold various taxes. Specifically, the employer must ensure that Social Security and Medicare taxes are paid as an employer and withheld from an employee’s paycheck. An employee will be required to pay federal and state income tax, so the employer may also withhold federal and state income tax, but is not required to do so. The employer will also need to pay federal and state unemployment tax. Due to complexities involved, many clients utilize payroll services to manage these obligations.

While many clients would like to avoid the requirements imposed as a result of an independent caregiver being treated as a household employee, the IRS considers the failure to treat an independent caregiver as an employee to be tax evasion, which can result in penalties and back taxes. Even more importantly, for our clients, the failure to treat the independent caregiver as an employee limits the possibility of the client from being eligible for certain tax benefits, such as the Tax Credit for Elderly Dependent Care and the Medical Care Tax Deduction.

Ask Neo: Reindeer

Hook Law Center: Neo, my children are excited to hear the prancing of reindeer on our roof later this month. What can you tell me about this holiday symbol?

Neo: Reindeer live in the Artic tundra and damp forests of Greenland, Scandinavia, Russia, Alaska, and Canada. They can adjust their body temperature to accommodate changes in climate temperature. They can actually lower the temperature in their legs to near freezing levels to keep their core body heat even. Additionally, in the winter, their facial hair grows long enough to cover their mouths so that their muzzles are protected from the snow.

Reindeer are the only deer species in which both the male and female can grow antlers. Although male reindeer shed their antlers every winter, female reindeer retain their antlers until they give birth to their young in the spring so they are able to compete for food during the winter while pregnant. 

Reindeer are strong and are generally considered to be more efficient than most other land mammals. They historically have been used in transportation to pull sleds and sleighs. Taking this into account, it is easy to understand how the reindeer came to be used to pull Santa’s sleigh.

Posted in Senior Law News