Caring for elderly parents is a monumental rite of passage, a situation that is spreading at an astounding rate in this country.
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Tax deductions are available for family members who provide care for an aging parent. As a caregiver, you may be eligible for tax breaks for taking care of an elderly person, if you and the elderly member meet certain requirements.
To make it easier to figure out which tax breaks are available Tom Breedlove, Care.com HomePay Business Development Director & Household Tax Expert, offered the following tips for family members providing elder care:
Boomer: What is the difference between a household employer and a commercial employer?
Breedlove: The IRS sees your provider, whether it’s a senior care provider, nanny or housekeeper, as your family’s employee and not a company’s employee. If you own your own company, the caregiver is not contributing to the success of the company. Instead, they are contributing to the success of the household. This is why taking a business payroll deduction on a household employee’s wages is illegal – and why families that pay a caregiver on the books qualify for tax breaks on their personal income tax return.
Boomer: What steps are taken in the household employer process?
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Breedlove: Before a family even begins interviewing prospective nannies, they should have a clear idea of what they’re looking for and establish an employment contract outlining their expected responsibilities, benefits, and payroll deductions.
By having the terms of your arrangement clearly spelled out in a contract signed by both of you, you’re not only formalizing the relationship, but you’re establishing guidelines upfront and ensuring both of you are on the same page.
Care.com HomePay can also help facilitate the conversation with your caregiver about the many ways being paid legally can benefit her.
In terms of the payroll and tax process, any caregiver earning $1,900 or more in a calendar year must have Social Security & Medicare taxes withheld from their pay. Income taxes are not required to be withheld, but it’s recommended so the caregiver doesn’t risk an underpayment penalty.
The family in turn must pay Social Security & Medicare taxes too – and they’ll need to pay federal and state unemployment insurance taxes. At the end of the year, they’ll provide their caregiver with a W-2 so he/she can file their taxes as well as file a Schedule H with their personal income tax return.
Boomer: Are there frequent changes to the household employment laws?
Breedlove: Yes. Families must abide by many of the same tax and payroll laws businesses do. When minimum wage rates, tax thresholds, reimbursement rates, etc. change, families need to adapt to stay compliant with the law.
From a legislative standpoint, there are two things changing the way people view household reporting: Domestic Workers Bill of Rights, which currently exist in New York, California, Massachusetts, and Hawaii, and the Affordable Care Act. Each of these laws bring attention to complying with federal and state payroll and tax laws – which is a big problem in the household employment industry.
Boomer: How is overtime handled in household employment?
Breedlove: The Fair Labor Standards Act classifies a caregiver as a non-exempt worker. This means they’re due overtime for all hours worked over 40 in a standard workweek. Because of this requirement, it’s important families pay their caregiver an hourly rate so they can easily calculate overtime when it comes up. Overtime is calculated at 1.5 times the caregiver’s hourly rate.
That’s why it’s important to have a simple employment agreement to make sure that both the family and provider are on the same page when it comes to total compensation and responsibilities. We actually have a free, downloadable template that you can use at care.com/nannycontract and offer free consultations if a family has questions on how to create one.
Boomer: What are the tax tips, traps and tax breaks for hiring in home care?
Breedlove: The most common mistake when it comes to managing a provider’s taxes is having them file a Form 1099 like an independent contractor. The reality is if you hire an individual to work in your home – whether it’s a nanny, senior care provider or housekeeper – the IRS says this person is your employee because you’re the one determining when, where, how and by whom the work should be performed. Now, something many families also don’t realize is that workers who are misclassified as independent contractors actually end up having a larger tax burden and fewer government benefits that they would if they were correctly classified as employees. So you’re actually doing a disservice to that beloved provider of yours – who’s like an extension of your family – when you treat her as an independent contractor.
As far as tax breaks are concerned, it all comes down to who is considered the employer. The qualifications are extremely important to follow as well, so it’s recommended you consult with a personal income tax expert to accurately calculate these potential savings.
Generally speaking however, if the elderly person receiving care is the employer, usually the only tax break they’ll qualify for is the Medical Care Tax Deduction. This is an itemized deduction for qualifying medical expenses 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.
If the employer is someone that can claim the elderly person as a dependent, they can utilize the Medical Care Tax Deduction, a Medical Flexible Spending Account (FSA), a Dependent Care Account, or the Dependent Care Tax Credit. It’s important to note that the same expenses cannot be applied to multiple tax breaks.
A Medical FSA allows the employer pay for up to $2,500 of qualifying medical expenses using pre-tax dollars.
A Dependent Care Account allows the employer to pay for up to $5,000 of qualifying care-related expenses using pre-tax dollars.
The Dependent Care Tax Credit allows the employer to itemize up to $3,000 of care-related expenses for 1 dependent or $6,000 for 2 or more dependents. Most employers will receive a 20% credit on these expenses and save up to $600 for 1 dependent and $1,200 for 2 or more dependents.