When it comes to dealing with a sick parent, one of the last things on a son or daughter’s mind is to establish a formal caretaker agreement and good record-keeping. With efforts to keep Mom or Dad at home, it is very natural to start paying someone to care for the aging parent, and forget about any tax consequences and Medicaid qualification implications.
It often comes as a surprise to a son or daughter who is serving as the guardian or attorney-in-fact that mom or dad’s sitter should be treated like an employee for tax purposes. To be clear, the rule is this: If you are directing the person’s activities, training them, determining their schedule, providing supplies, setting the pay-rate and paying cash wages of $2,000 or more for 2016 to any one person, in the eyes of the IRS this person is not an independent contractor, but instead deemed a domestic employee. Thus, you generally must withhold 6.2% of social security and 1.45% of Medicare taxes (for a total of 7.65%) from all cash wages you pay to that employee. You also must pay your share of social security and Medicare taxes, which is also 7.65% of cash wages. (Cash wages include wages you pay by check, money order, etc.) Unless you prefer to pay your employee’s share of social security and Medicare taxes from your own funds, you should withhold 7.65% from each payment of cash wages you make. Moreover, there should be an employee application, I-9, W-4, and NC-4 completed, and the employee should receive a W-2 at the end of the year. (https://www.irs.gov/taxtopics/tc756.html)
The I-9 is the Employment Eligibility Verification Form. It is used by an employer to verify an employee’s identity and to establish that the worker is eligible to accept employment in the United States. The W–4 is an Internal Revenue Service (IRS) form you complete to let your employer know how much money to withhold from your paycheck for federal taxes. The North Carolina Form NC-4 is the Employee’s Withholding Allowance Certificate. It must be completed so that you know how much state income tax to withhold from your new employee’s wages. These forms establish an employee profile for tax purposes and a Schedule H should be filed at tax time with mom or dad’s Federal Tax Return. Any local accountant can assist with the paperwork and filing requirements.
Establishing this formal employee-employer relationship with all the proper documentation and record-keeping can save the family a head-ache should long-term care become necessary. This makes clear that these transactions to pay caregivers are not gifts, therefore should not be considered sanctionable transfers. Not only are the proper forms and proper accounting necessary, but the pay-rate must also be reasonable and consistent with market wages. For example, if Jane, prior to becoming a Medicaid applicant, paid her niece $200 an hour as her caregiver this would send off alarm bells to Social Services that this is truly a gift, because in the open market $10-$20 an hour is a more appropriate hourly wage; therefore, anything in access would be considered a sanctionable transfer. Conversely, it would also be considered a sanctionable transfer to create a lump sum “back-payment” of caregiver fees. For example, Jane the Medicaid applicant, cannot spend down her funds by paying “back-wages” to her daughter who had been her caregiver for the past year. This too would be considered a gift and create a transfer penalty for Jane.
Certainly all of these rules can be difficult to navigate and can even be intimidating to one dealing with a sick parent for the first time. Whether you personally need a caregiver or the nice lady at church offers to care for your aging parent, it is best to consult with an elder law attorney and your CPA before you fork over cash that could very quickly add up and create a fiasco with Uncle Sam or a roadblock to Medicaid for long-term coverage.