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With the large aging portion of our country, hiring an in-home, private-duty senior caregiver has become very popular. In fact, it has also become one of the fastest-growing segments of the care industry. Part of this is due to the high cost of facility-based care. The other factor is the desire to enjoy the comfort and convenience of home. Quite often, the result is that you become a household employer and take on the responsibility of managing the caregiver, themselves.

If you decide to hire an in-home senior caregiver, you need to consider how they are classified. Many people believe that senior caregivers privately employed in the home can be classified as independent contractors, so that they may avoid paying payroll taxes. The IRS, however, has ruled that the vast majority of these caregivers should be classified as employees. Why? The family has the right to control how, what, when, where, or by whom the work should be performed. The number of hours do not matter. The amount of money that they are being paid does not matter. What they are called in the work agreement does not matter. In the eyes of the IRS, if you misclassify a household employee as an independent contractor, you could be charged with tax evasion. When paying for a caregiver to care of your loved one, the last thing that you want to worry about is being charged with tax evasion.

If you or your family employs a caregiver, there are some tax breaks that can significantly offset the employer payroll taxes. The tax breaks that are available to most families with caregiver needs are:

1. Dependent Care Account (a type of Flexible Spending Account)
2. Dependent Care Tax credit (Form 2441)
3. Medical Flexible Spending Account (for medical care)
4. Medical Care Tax Deduction (Schedule A – Itemized deduction for qualifying medical expenses)

The caveat with most tax breaks and rules, however, is that there are notes, criteria, and exceptions.

Making the decision between facility-based care and in-home care is not necessarily an easy one. Your trusted advisor/CPA can help you understand what solutions work best for you. They can create budgets so that you can see the various financial impacts so that you can make a decision that is best for your situation. Your circumstances may even qualify for assistance under a LTC plan or a government program.

-Michael Hermanson, CPA | CGMA