Paid Family Caregivers of Elderly Parents Could Face Tough Tax Rules

As aging parents begin to need assistance with daily tasks, adult children will face the difficult choice of either caring for their parents themselves, or outsourcing their needs to outside caregivers or nursing homes. When it comes to this decision, there are a lot of factors to consider, including cost.

It’s no secret that outside care is expensive. Providing care within the family, however, carries its own out-of-pocket concerns. As care needs escalate this can include the opportunity cost of time spent with the elder parent instead of at a job.

One way to deal with this dilemma is for the family caregiver to be financially compensated by the aging parent. Elders can choose their caregivers and this choice can include their adult children. In this circumstance, however, you should consider consulting with both an elder law attorney and a qualified accountant first. In both instances, these professionals can provide insight into the rules that apply. Depending on the circumstances, a paid family caregiving arrangement might not make sense.

In some instances, the Internal Revenue Service considers a paid family caregiver an employee of the elder parent because the elder parent tells them what to do and then pays them for their work, similar to any job. Accordingly, the elder parent, or the family member, can then be responsible for a variety of taxes depending on the amount of wages paid. They also can be responsible for preparing and filing tax forms or hiring an accountant to do so.

According to the Journal of Accountancy, the tax responsibilities of an aging parent “employer” can include:

  • Collecting and remitting the family caregiver’s withholding tax obligation.
  • Collecting and remitting the family caregiver’s Social Security and Medicare tax obligations (and pay the family’s match of these taxes).
  • Paying federal and state unemployment taxes on taxable wages.
  • Maintaining appropriate records to support these filings.

In cases where paid family caregivers are not considered employees, they may still need to report any compensation from their elder parent as income. Further, self-employment tax could apply if they are being paid as an independent contractor.

As with almost all things involving taxes, the question of whether adult children should provide paid care services for their elder loved ones is not as easy as it seems. Each situation has its own circumstances that determine if it’s worth it. In Florida specifically, when an aging parent has care being provided to him or her by an adult child, a personal services agreement may need to be entered into. With the help of an experienced elder law attorney, this contract can prevent any amount of money being paid to the child to later be seen as a gift should the parent need to apply for public benefits programs such as Medicaid. Do not wait to contact our office to ask your questions and discuss this matter further.