IRS Notice 2014-7, Difficulty of Care Payments Excludable from Income

This courtesy notice is provided by ALTSA regarding information about federal tax requirements affecting Individual Providers. If you are an Individual Provider who lives with your client, the income you earn for providing care services can be excluded from your federal income taxes.

On January 21, 2014, the IRS issued Notice 2014-7. The Notice explained that the IRS treats certain payments for personal care services as “Difficulty of Care payments”, which are excluded from federal income taxes. The exclusion covers income earned through the provision of personal care services, when the Medicaid client and provider live in the same household.  As it is written, the IRS Notice only applies to the exclusion to payments for personal services provided under a Home and Community Based Services (HCBS) waiver programs, such as COPES, that operate under section 1915(c) of the Social Security Act.

Because the IRS Notice did not mention personal care services provided by other programs, such as Medicaid Personal Care and the Community First Choice (CFC), DSHS requested a Private Letter Ruling from the IRS. The request asked the IRS if the same tax exclusion applies to payments made for personal care services that are funded through other similar programs. On March 18, 2016, the IRS ruled that the income exclusion can be extended to Washington State providers, who provide personal care services to clients under Community First Choice (CFC), Medicaid Personal Care (MPC), HCBS waiver programs and similar state-funded programs.

Individual Providers are eligible for the Difficulty of Care income exclusion if the Provider lives with the DSHS client in the same household. This means that the wages that IPs  earn for providing personal care to a DSHS client whom they  live with are excluded from the IP’s  income for income tax purposes.

The Difficulty of Care income exclusion applies only to personal care services and relief care,[1] which are listed separately on year end W2 earning statements.  The exclusion does not apply to payments made for respite care[2], skills acquisition training, travel time, required trainings, or paid time off.  The IPOne payment system is not yet able to exclude the qualified payments from being reported on your W2.  End of year W2s issued by IPOne will report the full amount of wages paid during the preceding tax year.  However, the description section of your end of year W2 earning statement lists the amount paid for specific services, including personal care services and relief care.  The exclusion does not apply to payments you receive directly from your clients, which are known as “client participation” amounts. 

It is your responsibility to determine if this income tax exclusion applies to you.  Also, you are responsible for identifying which payments are for personal care services or relief care and then excluding only those amounts from your gross wages on your tax returns.  If you need assistance or have questions about your eligibility or how to file your year-end tax return, please contact a tax professional or the IRS.   

DSHS is working with the IPOne vendor, PPL, to automate a change so that the Difficulty of Care payments will be automatically excluded on the W-2 Forms for eligible providers.  More information will be shared when this change is ready.

The exclusion applies to all open tax years where criteria for this exclusion are met.  Please contact your tax advisor or the IRS with questions about which tax years are open and how to claim this exclusion or amend a prior return.

If you have tax questions, you may contact the DSHS tax desk at:

The IRS FAQs can be found at this link.  Question 11 on the IRS FAQs identifies what line on the 1040 to claim and make this adjustment.

[1] Relief Care is an authorized benefit used when the client's in-home personal care provider is not available or needs a break and the client chooses to use their authorized hours to pay a different contracted provider to deliver the personal care services.

[2] Respite Care is care provided by a contracted provider on an hourly basis to permit time-limited, intermittent respite from caregiver responsibilities