Family caregivers and self-employment tax

Special rules apply to workers who perform in-home services for elderly or disabled individuals (caregivers). Caregivers are typically employees of the individuals for whom they provide services because they work in the homes of the elderly or disabled individuals and these individuals have the right to tell the caregivers what needs to be done. Family members may or may not provide these services. If the caregiver employee is:

• Your spouse,
• Your child under the age of 21,
• Your parent, unless an exception is met, or
• An employee who is under age 18 at any time during the year, unless an exception is met

the employer may not owe employment taxes even though the employer needs to report the caregiver's compensation on a Form W-2. See Table 1, “Do You Need To Pay Employment Taxes” on page 5 of Publication 926, Household Employer's Tax Guide, for more information.

However, in some cases the caregivers are not employees. In such cases, the caregiver must still report the compensation as income on their Form 1040 or 1040-SR and may be required to pay self-employment tax depending on the facts and circumstances.

The following FAQs illustrate some fact patterns involving family member caregivers who are not employees.

Q 1: Must a taxpayer pay self-employment tax on the income they received from an insurance company to care for their spouse who was injured in an accident and permanently disabled? The taxpayer is caring for their spouse in their home in an effort to avoid moving them to a nursing facility and also to reduce care giving costs. The spouse requires assistance with dressing, bathing, eating, etc.; the taxpayer also administers medication and helps with basic physical therapy. The taxpayer is neither a trained nurse nor therapist and doesn't provide such services to anyone other than their spouse. The taxpayer received Form 1099-MISC from the insurance company with the amount paid shown in Box 3 as other income.

A 1: No, the taxpayer does not owe self-employment tax on amounts reported on the 1099-MISC they received from the insurance company if they are not engaged in the trade or business of providing care giving services, as appears to be the case in this situation. The taxpayer must report the full amount of the payment on line 8j of Schedule 1 (Form 1040), Additional Income and Adjustments to Income PDF.

Q 2: Must a taxpayer pay self-employment tax on the income received from a state agency to care for their grandchildren so that their daughter can work? Taxpayer doesn't have a day care business or look after any other children. Taxpayer receives Form 1099-MISC from the state agency with the amount paid shown in Box 3 as other income.

A 2: No, the taxpayer does not owe self-employment tax on amounts reported on the 1099-MISC they received from the state agency if they are not engaged in the trade or business of providing day care services, as appears to be the case in this situation. The taxpayer must report the full amount of the payment on line 8j of Schedule 1 (Form 1040), Additional Income and Adjustments to Income PDF. 

Q 3: Must a taxpayer pay self-employment tax on the income received from a state agency to care for their grandmother if the taxpayer operates a sole proprietorship adult day-care business for multiple clients, including their grandmother, in their home? The state agency pays for the care so that the grandmother need not be institutionalized. Taxpayer receives Form 1099-NEC from the state agency with the amount paid shown in Box 1 as nonemployee compensation.

A 3: Yes, the taxpayer owes self-employment tax since the taxpayer is engaged in a trade or business of providing care giving services as a sole proprietor operator of an adult day care. The taxpayer must report the full amount of the payment as income on both Schedule C PDF and Schedule SE PDF.