Are Medicaid Caregiver Payments Taxable in Virginia?

You finally got approved. Your mom's waiver hours came through, you were hired as her paid attendant, and the first payment landed in your account. Then a friend asks the question that keeps new family caregivers up at night: "You know you have to pay taxes on that, right?"

Maybe not. There is a federal rule — IRS Notice 2014-7 — that lets many family caregivers paid through a Medicaid waiver leave that money out of their taxable income entirely. But it turns on one specific detail that has nothing to do with how much you earn or how you are related to the person you care for. It turns on whose home the care happens in. Here is how that works for Virginia families, what your paperwork should look like, and the mistakes that quietly cost people money.

The short answer

If you are paid through a Medicaid home and community-based services (HCBS) waiver to care for someone who lives in the same home you do, the IRS treats those payments as "difficulty of care" payments, and they are generally excludable from your gross income. You do not pay federal income tax on them.

If you are paid to care for someone who lives at a different address — you drive to your mother's house each morning and go home at night — the exclusion does not apply. Those wages are ordinary taxable income.

Same program. Same work. Same relationship. Two completely different tax outcomes, decided by the living arrangement.

What IRS Notice 2014-7 actually says

In 2014 the IRS issued Notice 2014-7, which treats certain state Medicaid waiver payments as difficulty of care payments under section 131 of the tax code. The notice applies to payments received on or after January 3, 2014. Boiled down, the payments qualify when:

• They are made under a state Medicaid HCBS waiver program. In Virginia, the CCC Plus Waiver — part of Cardinal Care — is the main waiver covering personal care for older adults and adults with disabilities.
• They pay you for personal-care-type services named in the person's plan of care: help with bathing and dressing, meal preparation, laundry, and similar daily support.
• The person receiving the care has the same home as you.
• You are not caring for more than five eligible adults (age 19 or over) in that home.

Notice what is not on that list: your relationship to the person. The IRS applies the same treatment whether you are a daughter, a spouse, a nephew, or someone unrelated. It also does not matter that the money originates with Medicaid rather than the family — what matters is the program, the services, and the address.

"Same home" is stricter than it sounds

This is where most families get tripped up. The IRS defines your home as the place where you reside and regularly carry out the routines of your private life — where you share meals and spend holidays. In its official questions and answers on Medicaid waiver payments, the IRS is direct about the boundary: a caregiver who keeps a separate residence and returns to it on weekends is working in the care recipient's home, not their own, and cannot exclude the payments.

The reverse also holds, and it is good news for a lot of Virginia households. If you genuinely moved into your mother's house, or she moved into yours, that is one shared home and the exclusion can apply. And if more than one person living in that home is paid to provide care — say you and your sister both have authorized hours — each of you may be able to exclude your own payments.

Two situations we hear about every week

Your parent lives with you

This is the classic case the rule was written for. The care happens inside your household, and if you are paid as the attendant through consumer-directed care in Virginia, those payments may be excludable from your federal taxable income. The same analysis applies to a spouse caring for a spouse in the shared marital home, which matters more than it used to now that Virginia allows spouses to be paid caregivers in more circumstances.

You are the caregiver, but you live across town

If you keep your own apartment in Woodbridge and drive to your father's place in Alexandria every day, the exclusion does not reach you. Your wages are taxable, and you should plan for withholding like any other job. That is not a reason to give up the position — being paid for care you were already providing is still the point — but it does change what lands in your bank account after taxes. It is worth factoring in when you look at what the CCC Plus Waiver pays caregivers.

Tax free does not mean paperwork free

Excludable payments still generate forms, and the forms have changed over the years. Two things to expect:

• If you receive a W-2: nontaxable Medicaid waiver payments may now be reported in box 12 with code II rather than in box 1. Box 1 showing a smaller number than you were paid is not necessarily an error.
• If you receive a Form 1099: the IRS explains how to report the amount and then back it out, so the payments are disclosed but not taxed. This is a step tax software often handles poorly, so check the result rather than assuming.

One more point that saves self-employed caregivers real money: the IRS has stated that these payments are not self-employment income and are not subject to self-employment tax, even when they were reported on a Schedule C. If a preparer has been running waiver payments through self-employment tax, that is worth a second look.

Social Security and Medicare taxes are a separate question

Notice 2014-7 answers an income tax question. Whether Social Security and Medicare (FICA) taxes come out of your check is decided under different rules — the ordinary rules for household employment.

That matters here because of how consumer-directed care is structured. Under Virginia's model, the Medicaid member (or their designated representative) is the legal employer of record who hires, trains, and supervises the attendant, while a fiscal/employer agent runs payroll and handles tax filings on the employer's behalf. Because a family member is the employer, the household-employment exemptions in IRS Publication 926 can come into play: wages an employer pays to a spouse, to a child under 21, or generally to a parent are not subject to Social Security and Medicare taxes, and wages to those same relatives are excluded from federal unemployment tax. A narrow exception can make a parent's wages taxable for FICA when the parent is caring for the employer's young child under specific family circumstances.

There is a real trade-off buried in that exemption. Wages that are not subject to Social Security tax do not add to your own Social Security earnings record. For a caregiver in their fifties who left a job to do this full time, that is a conversation worth having with a tax professional before assuming the exemption is a pure win.

Practical step: tell your services facilitator and your fiscal/employer agent the exact relationship and living arrangement when you are enrolled. They are the ones who set up your withholding, and correcting it later is far more work than getting it right at hire.

The credit families accidentally give up

Here is the counterintuitive part. If your waiver payments are excluded from income, they normally are not "earned income" either — and the Earned Income Tax Credit and the Additional Child Tax Credit are calculated from earned income. A caregiver with children whose only income is excluded waiver pay can end up with no credit at all.

The IRS allows you to choose to include your nontaxable Medicaid waiver payments in earned income for purposes of those credits. It is an all-or-nothing choice, and it is not automatic. For some families including the payments produces a larger refund than excluding them; for others it does not. The only way to know is to run the return both ways, which is a reasonable thing to ask any preparer to do.

What about Virginia state income tax?

Virginia's individual income tax calculation begins with your federal adjusted gross income and then applies state-specific additions and subtractions. As a practical matter, income that never enters your federal adjusted gross income generally is not picked up as Virginia taxable income either. Because state conformity provisions are adjusted by the General Assembly from time to time, confirm your specific situation with the Virginia Department of Taxation or a Virginia tax preparer rather than assuming.

A Virginia note before you file

Tax rules and Medicaid rules move on separate tracks, and both change. Virginia's consumer-directed program details — who may serve as employer of record, which fiscal/employer agent your health plan uses, how shifts are submitted — are set by the Department of Medical Assistance Services and are described on the state's consumer-directed services page. This information is for general guidance only and isn't legal, tax, or medical advice — program rules and figures change, so confirm current details with the official source, a qualified tax professional, or our team.

How Godaelli helps

We are a Northern Virginia home care agency, not a tax firm, and we will not pretend otherwise. What we do is get families through the part that comes first: confirming whether your loved one qualifies, getting the screening and authorization done, and setting up the caregiver arrangement correctly from day one — including making sure the relationship and living arrangement are documented accurately with the services facilitator and payroll agent, so your paperwork reflects reality when January arrives.

If you are still earlier in the process, start with how to get paid to care for a family member in Virginia, or read our overview of the five ways family caregivers can get paid in Virginia. Then talk to a tax professional about your specific return — walking in already knowing the words "Notice 2014-7" puts you ahead of most people who sit down in that chair.

Questions about getting your loved one approved, or about becoming their paid caregiver? Contact our team, call 703-870-0738, or email care@godaellihomecare.com. We will walk you through it, at no cost, in plain language.