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The Fate of Family Employers of Caregivers at Tax Time


Photo Credit: Craig from Glasgow, Scotland

We are smack in the middle of the Baby Boomer generation’s arrival into retirement age. What that means is that for years to come a huge portion of the population is tending to the needs of their aging parents and/or having to hire caregivers to help out.

This time of life can get pretty complicated when it comes to taxes. Depending on who is paid to care for aging parents, whether a family member such as a college-attending caregiver, hired domestic workers or a third party service, the IRS wants their cut!

According to a recent article in Accounting Today, there are some tax benefits to be gained. The article states, “While both families and domestic workers can face complex tax issues such as the so-called “Nanny Tax,” there are some tax benefits as well. For example, families are able to reimburse their college-attending caregiver for their tuition (up to $5,250) tax-free…” 

Due to the inherent tax complications of care giving, a trustworthy tax attorney or accountant is often required to help families make sure they are filing their taxes properly and don’t come under IRS scrutiny. As it turns out, according to a poll cited in the Accounting Today article, “80 percent of respondents said they would hire household care for their family from a local college, but only 19 percent are aware of the tax benefits associated with hiring a college caregiver.” Clearly taxpayers can benefit from hiring local college students or their own family members who are college students. While it is important to be aware of the tax benefits of hiring college caregivers, the issues involved with hiring domestic help or a third party are much more complicated and tend to be where the trouble lurks.

Among the most common issues that trip up these household employers and employees are overtime pay and fixed salaries. According to the Accounting Today article, “…Federal law specifies that all “non-exempt” workers must be paid time-and-a-half for all hours over 40 during a seven-day work week. Fixed salaries are illegal.” It is also stated that, “While federal law exempts live-in employees from overtime law, some states have their own overtime requirements for live-in employees. For example, in New York it’s over 44 hours per week.”

Very often taxpayers claim deductions for payments to a “companion” to an elderly parent. However, this year the exemption for these kinds of companions can no longer be exempt if the caregiver is a third-party employee. Third party caregivers are entitled to overtime pay. If the family directly employs the caregiver, however, overtime pay is not required.

If you employ a caregiver be aware of the recent changes that may affect you this coming tax season. If you are not sure, call on your accountant or a tax attorney for clarification of the new laws and help making sure you will not be raising any red flags. The stress of caring for elderly parents is enough without the added stress of an IRS inquiry.

Taxation Solutions, Inc.

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