Family Caregiver Agreement

[Dan32]

Wondering if anyone has experience with a Family Caregiving Agreement. Background: DW and I are both retired. DW and and DSIL have been providing care to DMIL on an as needed basis. On the advice of other caregivers and an attorney we have enacted a Family Caregiver agreement. The amount of care she needs has ranged recently from 24 hrs / day to only a few hrs per week. If she ever needs to be admitted to either an assisted living facility or a nursing home her assets would be depleted in less than a year. The agreement states that care will be provided by DW and DSIL on an as needed basis and is expected to be a minimum of 1 hr / week.

Questions:

1. Our understanding is that DW and DSIL will be treated as employees of DMIL and not contractors?
2. As employees DW and DSIL will be required to claim this pay as income and pay taxes on this income. However, the income will not be treated as self employed income?
3. DMIL will provide DW and DSIL with1099s for the above income and report it to the IRS. Obviously, we will need to do this for her since she is not able to do this. Is this correct? DW is Medical and durable Power of attorney
4. Although the agreement the attorney prepared states a minimum of 1 hr/week is expected, would it be a problem if there is a week where no care is recorded? We asked the attorney this question, but received an answer that we could always "bill" at least an hr per week since DW and DSIL speak with her daily. What if one or both of them goes on vacation out of the country (post pandemic) and turns the care over briefly to someone not on the agreement?
5. Any experiences or advice on managing one of these agreements would be appreciated.

 

[Sunset]

Why would you have the caregivers as employees, giving up the benefits of being contractors and forcing DMIL to pay employee taxes etc...

I honestly don't see why someone would do this, except the attorney gets to charge some fees, and no doubt has offered to help for a fee with the taxation issues created by this.

What is the issue you are trying to solve by doing this ?

 

[pacergal]

Never heard of something like this.
Siblings and I cared for DF for his last year, each taking turns in between bouts in a rehab center. We were never paid for it though, and didn't think to be.

Curious as to the reason for the agreement?

 

[cathy63]

...

Questions:

1. Our understanding is that DW and DSIL will be treated as employees of DMIL and not contractors?
2. As employees DW and DSIL will be required to claim this pay as income and pay taxes on this income. However, the income will not be treated as self employed income?
3. DMIL will provide DW and DSIL with1099s for the above income and report it to the IRS. Obviously, we will need to do this for her since she is not able to do this. Is this correct? DW is Medical and durable Power of attorney
...

If they are employees, then you need to provide them with W-2s. You also need to pay their payroll taxes, withhold federal and state tax, figure out whether you need workman's comp and unemployment insurance, etc.

If they are contractors and they earn over $600/yr, then you pay them via a 1099. They are responsible for deciding if they are running a business and should file Sched C and pay self-employment tax, or if this is misc income that they will report on Schedule 1.

Obviously it is much easier for you if they are contractors.

Another option might be to explore your state's Medicaid Waiver program for in-home caregivers.

 

[Dan32]

The primary reason for having the agreement is to avoid the 5 year look back period for Medicaid should she need more care than DW and SIL can provide. DMIL wants to leave some small amount of inheritance to her children and grandchildren and is looking at the real possibility of having nothing left in her estate since DW and SIL are unable to provide around the clock care long term. So she is paying my DW and SIL for the care she is providing and will distribute "their" money per MILs wishes less the taxes they pay. Without the agreement any money MIL gives them is considered a gift and could put her into a penalty phase for qualifying for medicaid/

 

[Dan32]

The following is from the IRS website and is what I was referred to concerning the employee / contractor question and other tax issues.

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. These services may or may not be provided by a family member. If the caregiver employee is a family member, the employer may not owe employment taxes even though the employer needs to report the caregiver's compensation on a Form W-2. See 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 of his or her 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 she received from an insurance company to care for her spouse who was injured in an accident and permanently disabled? The taxpayer is caring for her spouse in their home in an effort to avoid moving him 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. Taxpayer is neither a trained nurse nor therapist and doesn't provide such services to anyone other than her spouse. Taxpayer received Form 1099-MISC from the insurance company with the amount paid shown in Box 7 as nonemployee compensation.

A 1: No, the taxpayer does not owe self-employment tax on amounts reported on the 1099-MISC she received from the insurance company if she is not engaged in a 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 7a, Other Income, of Form 1040 or 1040-SR.

Q 2: Must a taxpayer pay self-employment tax on the income received from a state agency to care for his grandchildren so that his 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 7 as nonemployee compensation.

A 2: No, the taxpayer does not owe self-employment tax on amounts reported on the 1099-MISC he received from the state agency if he is not engaged in a 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 7a, Other Income, of Form 1040 or 1040-SR.

Q 3: Must a taxpayer pay self-employment tax on the income received from a state agency to care for her grandmother if the taxpayer operates a sole proprietorship adult day-care business for multiple clients, including her grandmother, in her home? The state agency pays for the care so that the grandmother need not be institutionalized. Taxpayer receives Form 1099-MISC from the state agency with the amount paid shown in Box 7 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 and Schedule SE.

 

[OldShooter]

If this arrangement is to comply with your state's spend-down rules, that's fine. If not, though, (as others have said) I don't think it's a good approach. Just let DMIL give periodic gifts to her caregivers. No one except possibly state medicaid is going to audit this anyway. So if small gifts like this are OK with them then it is a good tactic.

I've been through the 1099/W-2 wars and you're right that in your scenario they are probably employees per IRS rules. But there are hundreds of thousands, probably millions, who get 1099s when they should be getting W-2 income. Few get audited and your chances of getting audited are near zero too. I would go the 1099 route and make ready a good excuse if someone objects. (This is not the kind of thing that attorneys and CPA dare tell you.)

 

[Dan32]

OldShooter - You are correct the arrangement is to comply with the state's spend down rules. The advice we received to set-up this arrangement came primarily from other people who had been through this process. Some who had the agreement in place and some who didn't, where penalized, and had to ask for monetary gifts to be returned to pay for care. We only contacted an attorney after deciding to do this. I agree small gifts are OK, but we would be looking at needing to gift ~$50000 in a relatively brief period of time. Note that they count the cash value of life insurance in this total which she would need to cash out and gift. We know now that gifting would have been a good idea if we had done it more than 5 years ago but would raise a red flag now. BTW the attorney's fee for the caregiver was not much. The bigger issue is the taxes for DW and DSIL which will dwarf the cost of the caregiver agreement. Also neither DW or DSIL need the money and are doing this to be able to distribute this money held in a joint account by them per MILs wishes.

 

[youbet]

Before you spend MIL down to zero or near zero, consider how you will find an acceptable NH if she will be on Medicaid from the beginning.

It may be different in WVa where you live, but here in Illinois it's tough to find quality facilities who will accept a client who will be on Medicaid from day one. Most strongly prefer the client be able to private pay for 1 to 2 years. The facilities which are filled with mostly (typically all) Medicaid clients and gladly accept them are frequently, shall we say, not top notch.

You want your MIL to be in a facility which is primarily occupied by private pay clients who can pick and choose where they reside. And, at least here, the few Medicaid beds in those facilities are occupied by clients who started there as private pay and ran out of money along the way.

Again, WVa may be different from Illinois in this regard. But do your homework and understand how entering a NH on Medicaid will impact your ability to find one where your DW and SIL won't be concerned.

 

[Sunset]

So by doing this, you will be restricting the choices of nursing homes to ones that accept medicare as the only form of payment.

This will restrict the choice and availability of homes.

All this effort, and the expense of doing it (guess $10,000 comprised of fees, taxes paid by DW and DSIL, employee fees and taxes) will of course be wasted should the MIL quickly die, or she does actually suddenly need more care even in the home (although the expense setting this up would be less at that point.)

<edit: cross post a bit>

 

[CardsFan]

OP:

If I understand correctly, the objective is for DMIL to have about $50,000 (minus any taxes paid) available to be distributed to heirs upon her demise, even if she must go into a NH on a Medicaid basis.

I don't have a moral, ethical, or legal problem with what you propose. DMIL needs care, and if DW and DSIL were not there she would need to pay someone for the care, so why not pay them. But I am not sure this is the best thing for DMIL.

First, FICA taxes will be 15.3%, Federal taxes on the incremental income to DW and DSIL will likely be at least 12%, and maybe 22%-24%, depending on your filing brackets, then state tax, if you have one, of maybe 5-10%. So, you would reduce the distribution by at least 27%, and maybe as much as 40% or more.

More importantly, if DMIL does indeed need to enter a NH, I think that money would be far better spent using it to self pay into good NH, that will allow Medicaid later on, as opposed to having her find a home that will take Medicaid from the start. They may not be the same quality.

FWIW, I have a friend who is 76 and is in a very similar position as DMIL, with one daughter carrying all the water for him. I have given him the same advice, and his daughter is in full agreement.

EDIT: another cross post

 

[OldShooter]

... The bigger issue is the taxes for DW and DSIL which will dwarf the cost of the caregiver agreement. ...

Yeah. Too bad. (1) Some consolation/Since it's earned income they can probably contribute to retirement accounts. (2) Quickbooks has a payroll module. I have used QB a lot in various endeavors but never used this module. It may be your cheapest option. Paychex and ADP are the largest payroll services. If you don't want to go the QB route, a local salesperson at one of those companies can probably point you to smaller companies who will take a customer with only two employees. This would be a logical business for new-economy companies like Square but I don't know if they are doing it.