April 15th: it’s a date we’re all familiar with as it is the deadline for filing Income Tax Returns. Or it’s what we commonly refer to as Tax Day. While ensuring that we as taxpayers meet the deadlines is stressful enough, filing taxes can become even more daunting for caregivers.
According to the MetLife Mature Market Institute, almost 10 million adults 50 years or older cared for an aging parent in 2011, and this number has only increased since. To assist this growing number of adults, certain tax breaks are available for family members providing care for a parent, but only if certain requirements are met.
In a recent article, Care.com’s HomePay Business Development Director and Household Tax Expert Tom Breedlove provided tips and explained the available tax breaks for caregivers.
Key Questions Answered
So why exactly are families who pay for a caregiver eligible for tax breaks?
A caregiver is considered a household employee, not a commercial employee, since the IRS views a caregiver as a contributor to the success of the household. It is for this reason that families paying a caregiver may qualify for tax breaks.
What is the tax process for the caregiver and the family?
The caregiver is required to withhold Social Security and Medicare taxes from their pay if they earned at least $1,900 in the previous calendar year. To avoid receiving an underpayment penalty, caregivers should also withhold income taxes (although this is not required).
The family hiring the caregiver must pay Social Security and Medicare taxes along with paying both federal and state unemployment insurance taxes. It is also important for the family to provide the caregiver with a W-2 well in advance so his/her taxes can be filed along with a Schedule H (Household Employment Taxes) form.
What specific tax breaks are available for the caregiver’s employer?
Breedlove encourages consulting a personal income tax expert to ensure you are making the most of the tax breaks for caregivers. But in general, the only tax break available to the elderly person acting as the employer of the caregiver is the Medical Care Tax Deduction. Medical expenses prescribed by a licensed healthcare practitioner along with therapeutic, rehabilitative, maintenance and personal care services are all qualified expenses associated with this particular tax deduction. However, these medical expenses need to make up at least 7.5 percent of the elderly person’s Adjusted Gross Income for this tax deduction to apply.
On the other hand, if the family of the elderly person is considered the caregiver’s employer, then they can qualify for a Dependent Care Account, a Medical Flexible Spending Account (FSA), the Dependent Care Tax Credit or the Medical Care Tax Deduction.
However, both caregivers and families should be aware that the same expenses cannot be used for multiple tax breaks.
Some Extra Tips
- Before hiring a caregiver, it is important for the whole family to discuss the qualities and qualifications they are looking for in a potential caregiver. Create an employment contract that includes the caregiver’s responsibilities, payroll deductions, benefits, and the protocol for overtime.
- Pay your caregiver at an hourly rate to make your calculations easier. Remember: caregivers are classified as non-exempt workers by the Fair Labor Standards Act, meaning that they should be paid overtime (1.5 times the hourly rate) for all hours exceeding the normal 40-hour workweek.
- Contrary to popular practice, caregivers should not file a Form 1099, which designates a self-employment or independent contractor income. By filling out this form, the caregiver is actually deprived of receiving a greater amount of government benefits and is given a heavier tax burden.
- Be aware of any changes made to the household employment laws. Families and businesses follow the same tax and payroll laws, and household employment laws often change.