If you're paid through a Medicaid waiver to care for someone who lives in your home, those Medicaid waiver payments usually aren't taxable on your federal return.

That's because of IRS Notice 2014-7, which lets the IRS treat qualified Medicaid waiver payments as difficulty-of-care payments excluded from your federal gross income. The Notice 2014-7 exclusion turns on one condition about where you live, it doesn't reach every Medicaid program, and it doesn't make the payments tax-free in every sense. Here is how to tell where you stand before you file.

In This Guide

Are Medicaid Waiver Payments Taxable? It Turns on Whose Home the Care Is In

The IRS decides this question on one fact about your living arrangement, and the answer runs in both directions.

Under IRS Notice 2014-7, the IRS treats qualified Medicaid waiver payments as difficulty-of-care payments excludable from the caregiver's federal gross income under Internal Revenue Code section 131. The exclusion applies when a caregiver is paid to provide personal care to an eligible individual through a state Medicaid Home and Community-Based Services (HCBS) 1915(c) waiver program and the caregiver and the care recipient share the same home as the caregiver's primary residence. The exclusion does not apply when the care provider maintains a separate home where they regularly reside.

Asked about a caregiver who works in the care recipient's home but keeps a separate home of their own, the IRS answers no: "the provider works in the care recipient's home, but the provider has a separate home where the provider resides and regularly performs the routines of the provider's private life, such as shared meals and holidays with family. Therefore, the provider does not provide care for the care recipient in the provider's home, and the provider may not exclude the Medicaid waiver payments from gross income."

If that describes your arrangement, the Notice 2014-7 exclusion isn't yours, and finding that out in January is far better than finding it out in a letter two years from now.

What "your home" means when you moved in with a parent

Families worry about this one because the house belongs to Mom. Whose name is on the deed doesn't matter; the Notice 2014-7 exclusion turns on where the caregiver actually lives. A caregiver who moved into an elderly mother's home and has no separate home asked the IRS whether she was providing care in "the provider's home," and the IRS answered yes: under section 131 "the provider's home" means "the place where the provider resides and regularly performs the routines of the provider's private life, such as shared meals and holidays with family," and "the mother's home became the provider's home."

Three more situations the IRS has answered directly, all of them turning on the same location test:

  • Two caregivers in one household can both exclude their pay. More than one care provider living in the home with the care recipient may each exclude their Medicaid waiver payments.
  • Respite care given in the recipient's home doesn't qualify for the Notice 2014-7 exclusion, and neither does respite given in your home when the care recipient doesn't live there. The exclusion applies only to care in the care provider's own home, where the care recipient lives under their plan of care.
  • Vacation pay isn't covered by the Notice 2014-7 exclusion. The only amounts excludable from federal gross income under Notice 2014-7 are payments for the care of the disabled individual.

One more distinction, if your program has a cost-share. Where a state Medicaid waiver program requires the person you care for to pay the administrator part of the cost, you may still exclude from your federal gross income, under Notice 2014-7, the entire payment you receive from the administrator. What you may not exclude is a direct payment the care recipient makes from their own private funds.,

Which Programs Notice 2014-7 Actually Covers

This is the second place people get a wrong answer: nobody thinks of their program as "a 1915(c) waiver." They know it as consumer direction, self-direction, or whatever their state calls it.

Notice 2014-7 is written for payments to individual care providers under a state Medicaid Home and Community-Based Services waiver program described in section 1915(c) of the Social Security Act. For a Medicaid program that is not a 1915(c) HCBS waiver, such as a Medicaid state plan personal care benefit or the section 1915(k) Community First Choice option, the exclusion is not automatic: the IRS says its treatment depends on the nature of the payments and the purpose and design of the program. If you're paid through one of those programs, confirm your specific program with a tax professional before assuming either answer.

The agency that issues your pay or your state's Medicaid office can tell you which authority your program runs on. Ask them: is this program authorized as a section 1915(c) home and community-based services waiver?

What the Form in Your Hand Means

The exclusion changes what you report; it doesn't stop paperwork from arriving.

When the payments are excludable, the IRS tells the agency paying you that "Federal income tax should not be withheld from the payments that are excludable from gross income under Notice 2014-7," that "Any amount excludable from gross income should not be included in box 1, Wages, tips, other compensation, of the employee's Form W-2," and that "If the entire amount you pay to the employee during the year is excludable from his or her gross income, box 1 of Form W-2 should be left blank." So a blank or zero box 1 is what the exclusion looks like once it reaches the form. In an answer updated on April 28, 2025, the IRS added that "If you received nontaxable Medicaid waiver payments, those amounts may now be reported to you on Form W-2, box 12, with Code II, instead of on Form W-2, box 1."

You may also receive nothing at all. The IRS tells a payer that "if you know that payments to an individual care provider are excludable from gross income under Notice 2014-7, you should not file a Form 1099-NEC reporting those payments."

What arrived What it usually means What it does not mean
W-2 with box 1 blank or zero The agency treated your pay as excludable under Notice 2014-7 That your state agrees, or that Social Security and Medicare tax was not withheld
W-2 with an amount in box 12, Code II The newer reporting route for nontaxable Medicaid waiver payments That you can ignore the form if you want the Earned Income Credit
W-2 with the full amount in box 1 The agency treated your pay as taxable wages That the pay is definitely taxable; the agency may not have your statement on file
1099-MISC or 1099-NEC The payer treated you as a nonemployee That you owe self-employment tax on excludable payments
No form at all The payer may know the payments are excludable and filed nothing That you have nothing to check; you still need your own records

If a form disagrees with your understanding of your situation, that's a conversation with the agency that issued it, not something to fix quietly on your return. The IRS gives that agency a route: a payer who does not have independent knowledge that the payments are excludable "may rely on a written statement by the payee, signed under penalties of perjury, unless you know that the statement is not true," and the IRS prints an example wording for that statement. The IRS attaches the same written-statement rule to a payer's decision not to withhold federal income tax and to its decision not to file a Form 1099-NEC.

How to Report Medicaid Waiver Payments on Your Return

The line numbers below are the ones the IRS's current Notice 2014-7 guidance names, and line numbers move from year to year, so check each against the Form 1040 and Schedule 1 instructions for the tax year you are filing.

If your pay came on a W-2. The IRS says: "If box 1 of your Form W-2 is blank or has zeros and you are choosing not to include nontaxable payments in earned income for purposes of claiming a credit (See Q&A 9), you do not need to report amounts from your Form W-2 on your tax return or attach your Form W-2 to your tax return." Otherwise, on the Form 1040 or 1040-SR for the year you are filing, report the box 1 amount on line 1a and the box 12 Code II amount on line 1d. Then, on the Schedule 1 for that same year, line 8s, enter the total of the nontaxable Medicaid waiver payments reported on lines 1a and 1d, in the entry space in the preprinted parentheses, as a negative number. That negative entry is what takes the money back out of income.

If your pay came on a 1099 and caregiving isn't your business. This is your route if you care for one relative and don't run a home care business. The IRS directs you to enter the payments reported on the Form 1099-MISC or 1099-NEC on line 1d of the Form 1040 for the tax year in question, and to enter your nontaxable Medicaid waiver payments on line 8s of the matching Schedule 1. It then draws the conclusion that matters most here: "Because the payments are nontaxable and excludable from income, and because you do not have a trade or business of providing these services, the Medicaid Waiver payments are not self-employment income subject to self-employment tax."

If you are a sole proprietor in a home care business. The route is different, and the outcome on self-employment tax is the same. Include the full amount from the 1099 as income on line 1 of your Schedule C for the year being filed, then report the nontaxable and excludable amount as an expense in Part V, Other Expenses, writing "Notice 2014-7" next to it. The IRS says that "Even though you are a sole proprietor because the amounts are nontaxable and excludable from income, the payments are not self-employment income and are not subject to self-employment tax."

If you have been dreading a self-employment tax bill on a year of caring for your mother, that IRS conclusion follows from the statute: section 131 keeps qualified difficulty-of-care payments out of gross income, and section 1402(a) defines "net earnings from self-employment" as "the gross income derived by an individual from any trade or business carried on by such individual," so money that never entered gross income was never in the base self-employment tax is computed on.

The Choice That Can Cost You: The Earned Income Credit

This part of the rule quietly decides real money for lower-income caregivers.

If the waiver payments are most of what you earned, excluding them from income can also remove the earned income that the Earned Income Credit and the Additional Child Tax Credit are calculated on. So the IRS allows an election in the other direction: "for open tax years, you may choose to include all, but not part, of these payments in earned income for determining the EIC or the ACTC, if these payments are otherwise earned income (wages or income from self-employment)."

The election to count excludable Medicaid waiver payments as earned income for the EIC or the ACTC is all or nothing, so you cannot include just enough of the payments to maximize a credit, and it reaches only open tax years and only payments that are otherwise earned income, meaning wages or income from self-employment.

Which way comes out ahead depends on your own numbers, filing status, and qualifying children, so we won't pick for you. Have a free tax preparation site or a paid preparer run it both ways.

Excluded Is Not Tax-Free: Social Security and Medicare

The exclusion is from federal income tax only. Plenty of caregivers hear it described as tax-free, and the gap between those two things is where people get caught out.

The IRS is direct about it: even where payments are excludable from gross income for federal income tax purposes, "they generally are wages for social security and Medicare tax purposes." Whether those taxes are actually due "depends on whether you are an employee of the agency, an employee of the individual care recipient, or an independent contractor," and "If the agency is your employer, the payments are subject to social security and Medicare taxes."

Where the person you care for is your employer, the household employment rules apply instead, and they carry relationship exceptions that can decide whether you see these taxes at all. Under those rules, payments for services performed for a spouse or a child, and services performed for a parent by a child under the age of 21, generally are not subject to Social Security and Medicare taxes.

When a family is the household employer and pays cash wages of $3,000 or more in 2026 to any one household employee, it generally must withhold the employee's 7.65% share, 6.2% for Social Security tax plus 1.45% for Medicare, and pay a matching employer share. IRS Publication 926 tells that family not to count some relatives' wages as Social Security and Medicare wages at all, however large the wages are:

  • If you're paid to care for your spouse: wages paid to the employer's spouse are not counted.
  • If you're under 21 and caring for a parent: wages paid to the employer's own child under the age of 21 are not counted.
  • If you're a parent being paid by your adult child's household: wages paid to the employer's own parent are not counted, with a narrow exception where that parent also cares for the employer's own child under 18 or a child needing an adult's personal care and the employer's marital status meets the publication's further conditions.

If your paycheck shows those taxes withheld and you think one of the exceptions above fits your household, start with whoever runs your payroll and ask which rule they applied to you.

Are Medicaid Waiver Payments Taxable in Your State?

We're not going to guess at this one.

Notice 2014-7 is federal guidance about federal gross income. Your state's income tax is set by your state's own law, and the answers genuinely differ. In Tennessee the question doesn't arise at all: the Tennessee Department of Revenue states that Tennessee has no individual income tax on wages, employer sponsored retirement income or most other forms of income.

Kentucky sits at the other end of the same question. The Kentucky Department of Revenue states that Kentucky's individual income tax law is based on the Internal Revenue Code, and the Kentucky return is built from federal adjusted gross income with Kentucky modifications on a Schedule M. Even with that structure, whether an amount you excluded from federal gross income under Notice 2014-7 is also outside Kentucky income is not settled by any source we hold, and we won't assert it for you.

Minnesota is the same shape: nothing on file establishes whether it conforms to the Notice 2014-7 exclusion for state income tax purposes, and reading a Minnesota answer out of the federal rule is the mistake to avoid.

Get the state answer from your state. Ask your department of revenue, or a free tax preparation site, one question: are payments excluded federally under IRS Notice 2014-7 included in this state's taxable income?

If You Already Paid Tax on Medicaid Waiver Payments

Plenty of caregivers find this rule years in, having reported the money and paid tax on it all along. That money isn't necessarily gone.

The IRS says: "You may file a Form 1040-X, Amended U.S. Individual Income Tax Return, if you received payments described in the notice in an earlier year and the time for claiming a credit or refund has not expired under § 6511 of the Internal Revenue Code." The IRS states the refund window as three years from the date the return was filed or two years from the date the tax was paid, whichever is later. That is the deadline section 6511(a) of the Internal Revenue Code sets, and section 6511(b)(1) allows no credit or refund once that period has run out.

In Part III of Form 1040-X, explain that the payments are excludable under Notice 2014-7. To help the return move faster, include the full name of the person receiving care and their taxpayer identifying number if you have it, copies of documents from third parties showing that you and the person receiving care resided in the same home in the year the claim relates to, and evidence that the person is receiving care under a state Medicaid waiver program.

One caution the IRS prints itself, easy to miss when you're focused on a refund: "Excluding payments described in the notice in an earlier year may affect deductions or credits that you claimed for the earlier year, as well as other tax items for the earlier year." If you claimed the Earned Income Credit in one of those years on the very income you'd now be removing, amending could reduce that credit. Run both versions before you file, or have a preparer run them.

Frequently Asked Questions

What should I give my agency so my W-2 comes out right?

A signed statement is the usual route. The IRS lets a paying agency that doesn't know independently whether your payments qualify rely on a written statement from you, signed under penalties of perjury, unless it knows the statement is untrue. The IRS's example wording begins "Under penalties of perjury, I declare that I am an individual care provider receiving payments under a state Medicaid Home and Community-Based Services waiver program for care I provide to" a named person "who lives in my home under the care recipient's plan of care." Ask your agency whether it has a form of its own.

I live with my mother and still got a 1099. Did the agency make a mistake?

Not necessarily; it may simply not have your statement on file. The IRS tells a payer that knows your Medicaid waiver payments are excludable under Notice 2014-7 not to file a Form 1099-NEC for them. If a 1099 arrives anyway and caregiving isn't your business, you still enter the amount on line 1d of Form 1040 and back the nontaxable amount out on line 8s of Schedule 1 (check both line numbers against that tax year's instructions); a home care business reports it on Schedule C instead. Either way, the IRS says excludable payments are not self-employment income subject to self-employment tax.

Mom pays me from her own savings under a care agreement. Is that excluded too?

No. Notice 2014-7 reaches payments made under a state Medicaid waiver program, and the IRS says an individual care provider may not exclude direct payments from a care recipient who pays part or all of the cost of care with the care recipient's private funds. Money paid under a private personal care agreement from your parent's own funds is outside the Notice 2014-7 exclusion.

I'm paid to care for my spouse. Does any of this change?

Being related doesn't block the exclusion. Notice 2014-7 treats qualified Medicaid waiver payments as excludable whether or not the provider is related to the person receiving care, so the same shared-home and 1915(c) tests apply to a spouse. On Social Security and Medicare tax, the relationship can matter: where the care recipient is your employer, the IRS says payments for services performed for a spouse generally are not subject to those taxes. Our guide to getting paid to care for your spouse covers which programs allow it.

Learn More

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Find personalized help getting paid to care for a family member at brevy.com.

The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.

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Expert eldercare guidance from Brevy's team of healthcare professionals and researchers.