Income Tax Issues with Family-Provided Long-Term Care Services

The Popularity of Home Care

Under HIPAA, the costs of providing "qualified long-term care services" for a "chronically ill individual" are deductible as a medical expense. Qualified expenses are deductible whether provided in a facility or in a private residence. Since "qualified long-term care services" includes "maintenance and personal care services" (if provided pursuant to a plan of care prescribed by a licensed health care practitioner), payments made to a caregiver under a caregiver agreement may be deductible as a medical expense by the elderly person.

However, the deduction is not permitted if the caregiver is the elderly person's spouse, lineal descendant, brother, or sister. See IRC § 213(d)(11) and 152(d)(2).

26 USC, Subtitle A, CHAPTER 1,Subchapter B, PART VII, § 213 Medical, dental, etc., expenses

(11) Certain payments to relatives treated as not paid for medical care.- An amount paid for a qualified long-term care service (as defined in section 7702B (c)) provided to an individual shall be treated as not paid for medical care if such service is provided -

(A) by the spouse of the individual or by a relative (directly or through a partnership, corporation, or other entity) unless the service is provided by a licensed professional with respect to such service, or
(B) by a corporation or partnership which is related (within the meaning of section 267 (b) or 707 (b)) to the individual
For purposes of this paragraph, the term "relative" means an individual bearing a relationship to the individual which is described in any of subparagraphs (A) through (G) of section 152 (d)(2).

This paragraph shall not apply for purposes of section 105 (b) with respect to reimbursements through insurance
(e) Exclusion of amounts allowed for care of certain dependents Any expense allowed as a credit under section 21 shall not be treated as an expense paid for medical care.

TITLE 26, Subtitle A, CHAPTER 1, Subchapter B, PART V, SEC. 152. DEPENDENT DEFINED.

(d) Qualifying Relative.--For purposes of this section--

(1) In general.--The term 'qualifying relative' means, with respect to any taxpayer for any taxable year, an individual--
(A) who bears a relationship to the taxpayer described in paragraph (2),
(B) whose gross income for the calendar year in which such taxable year begins is less than the exemption amount (as defined in section 151(d)),
(C) with respect to whom the taxpayer provides over one-half of the individual's support for the calendar year in which such taxable year begins, and
(D) who is not a qualifying child of such taxpayer or of any other taxpayer for any taxable year beginning in the calendar year in which such taxable year begins.

(2) Relationship.--For purposes of paragraph (1)(A), an individual bears a relationship to the taxpayer described in this paragraph if the individual is any of the following with respect to the taxpayer:

(A) A child or a descendant of a child.
(B) A brother, sister, stepbrother, or stepsister.
(C) The father or mother, or an ancestor of either.
(D) A stepfather or stepmother.
(E) A son or daughter of a brother or sister of the taxpayer.
(F) A brother or sister of the father or mother of the taxpayer.
(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
(H) An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.

The Domestic Employee Problem

My domestic (nanny, elder care giver, housekeeper) wants to be treated as a "contractor." Can I do that?

The simple answer is NO. A nanny, housekeeper, or home health aide that you hire directly is your employee under common law. It does not matter how many hours they work, whether the position is permanent or temporary, or how much you pay the worker.

Your nanny must be provided a Form W-2 every year for wage and tax reporting, and you must make payments to the Internal Revenue Service for Social Security and Medicare taxes, as well as the Federal Unemployment Tax (FUTA). It is improper to issue a Form 1099 to a nanny who earned $1700 or more (2010) in the year.

Under common law, a worker who performs services for you is your employee if you can control what will be done and how it will be done. It does not matter whether you give your nanny great latitude, but rather that you have the right to control the work. It does not matter if the work is performed on a full time or part time basis. It does not matter whether the worker lives with you or not. It does not matter if he/she is paid hourly, daily or a salary. It does not matter how the employee refers to herself or how you refer to him/her in an employment contract. The household worker is your employee and you are generally obligated for all payroll tax filings and remittances.

The IRS articulates strict guidelines that differentiate employees and independent contractors to further eliminate confusion. Nannies and other domestics are generally considered employees (Refer to IRS Publication 926: Household Employers Tax Guide). Remember, how the employee refers to herself or how you refer to her in an employment contract is immaterial. You are obligated for all payroll tax filings and remittances if you pay the worker $1700 or more in the calendar year (2009). The IRS has no statue of limitations when auditing and collecting nanny payroll taxes if you file false/fraudulent returns.

The IRS has reaffirmed this stance twice in 1999. In two private letter rulings (PLR 199923014 and 199923015) the IRS disregarded a written contract's designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker's status.

You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.

Household work is work done in or around your home by the following people.

• Babysitters
• Caretakers
• Cleaning people
• Domestic workers
• Drivers
• Health aides
• Housekeepers
• Maids
• Nannies
• Private nurses
• Yard workers
• Workers who are not your employees

If only the worker can control how the work is done, the worker is not your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.

A worker who performs child care services for you in his or her home generally is not your employee.

If an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.

Example

You made an agreement with John Peters to care for your lawn. John runs a lawn care business and offers his services to the general public. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees.

Avoid problems with the domestic employer rules.

• Don't hire any employee or worker "off the books." First of all, you would be subjecting yourself to potential civil and criminal penalties. Secondly, you would be opening a "can of worms" with regard to potential liability for taxes, penalty taxes, and additional charges. Think about your potential liability if your employee gets hurt and you don' have the required workers compensation coverage. What happens if you have a disagreement with your employee and he or she feels entitled to unemployment insurance but you have paid none?

The stronger a person insists on working "off the books" the greater reason you have for avoiding them. In addition to tax evasion there is probably another reason why they must work "off the books." It could be they are collecting some form of government or disability benefit based on a deceptive claim that they are unable to work. There is no reason for you to risk your neck to assist this person in perpetrating a fraud, and this is not the type of person you want to hire anyway.

One last reason for not paying any wages "off the books" is that you will be short changing yourself if the payment would otherwise qualify for a medical expense deduction or child care credit. You would not be able to prove your deduction before IRS without admitting your own wrongdoing.

• Try to hire your child care employee or household worker through a reputable agency that can handle the taxes and reporting requirements. It is much easier that way. In a similar fashion, you might give preference to a small corporation that provides cleaning services instead of a regular cleaning person. Even a one person corporation is preferable over an individual since it is less likely to involve any employment issues.
• If you cannot do your hiring through an agency, hire a payroll reporting company or a good CPA to handle the payroll chores. The requirements are just too complicated for you to handle alone.