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

If you are an Individual Provider (IP) who lives with your client, the income you earn for providing care services can be excluded from your federal income taxes.

DSHS cannot provide Tax Advice. If you have questions about how the information below impacts your tax situation, consult a Tax Professional.


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 being subject to 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 written, the IRS Notice only excludes payments for personal care services provided under 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 funded through 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.

Does this apply to me?

Individual Providers are eligible for the Difficulty of Care income exclusion if the Provider lives with the DSHS client in the same household. The wages earned by an IP for providing personal care to a DSHS client who 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 training or paid time off. The exclusion does not apply to payments you receive directly from your clients, known as "client participation" amounts.

In 2020, the IP payment system began excluding qualifying payments from your Federal Income Tax (FIT) calculation. In 2022, the Consumer Directed Employer (CDE) became the legal employer of IPs, and their payment system continues to exclude qualifying payments.

For years before 2020, what do I need to do?

It is your responsibility to determine if this income exclusion applies to you. You are also responsible for identifying which payments are for personal care services or relief care and excluding only those amounts from your gross wages on your tax returns. The Description section of your end of year Earnings Statement -- the last payday issued in the calendar year) – lists the amount paid for specific services, including personal care services and relief care. 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.   

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

I live with my client. How do I sign up?

Please note this is not an optional program for participation. If you are an Individual Provider who lives with your DSHS client, IRS guidance states this income exclusion applies to your earnings. The CDE payment system applies this income exclusion to your Federal Income Tax (FIT) obligation.

Visit the Consumer Direct Care Washington (CDWA) website at for information about the Difficulty of Care Federal Income Exclusion and other tax exclusions. Review these documents and the information on this site carefully.

If your living situation changes and you no longer live with your client at a future point, please notify Consumer Direct Care Washington. It is your responsibility to keep your living situation status up to date.


Information about Difficulty of Care payments can be found on the CDWA website. Please contact CDWA at (866) 214-9899 for questions about your attestations.

Please contact a tax preparation professional if you have tax questions about past years.

The IRS FAQs can be found at this link. Question 11 on the IRS FAQs identifies the 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 unavailable or needs a break. 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 responsibility.