According to a study conducted by AARP and National Alliance for Caregiving study, nearly 40 million Americans in 2014 were providing unpaid care to people who are older, disabled, or otherwise in need of assistance[i]. For those that leave jobs to care for family members, it can become a financial hardship for the family. Frequently, the family does not realize the legal intricacies involved in privately paying a family member or friend to provide care. Payments made to a family member or private caregiver who provides care can be a minefield of potential Medicaid and income tax issues.
Why do I need a written Caregiver Agreement?
Caregiver Agreements have long been used by individuals as part of an overall long-term care plan.
A written caregiver agreement is required in Pennsylvania to comply with Federal and State Medicaid policy. The caregiver agreement must outline the services to be provided and the rate of pay. Even where the family takes the necessary steps to prepare their own caregiver agreement, often they do not understand the intricate Medicaid policy regarding caregiver agreement and can end up stepping on a mine.
Since the Deficit Reduction Act of 2005 was signed into law on February 8, 2006, Caregiver Agreements have experienced higher scrutiny by local Medicaid agencies. Because of this higher scrutiny, it is important not only to have a properly drafted Caregiver Agreement but also the caregiver should keep a detailed written log of the services provided.
How does Medicaid view payment to a family member or friend for care?
Medicaid has a five (5) year look-back period, whereby should an individual enter a nursing home and apply for Medicaid benefits, the Department of Human Services (DHS) will look back five (5) years to see whether the applicant has made any transfers of property or assets without receiving fair market value. If you have, this will create a period of ineligibility.
Where a family member is being paid for providing care or where a private caregiver is hired, unless there is a written agreement or contract in place, Medicaid could construe the payments as a gift or uncompensated for transfer.
The cornerstone of the Caregiver Agreement relies on the premise that the care and services being provided by a relative or friend would require payment to a third party at prevailing market rates for identical services; thus, payment to the relative or friend is considered a fully compensated transfer for Medicaid eligibility purposes and should not result in the imposition of a penalty period.
Does the caregiver need to pay income tax in Pennsylvania?
Many improperly pay a caregiver without thinking of the income tax consequences. For many families the caregiver will be considered a “household employee.” The IRS views the household worker as an employee of the family. Misclassifying the caregiver as an “independent contractor” and issuing a 1099 is considered tax evasion.
Household employers in Pennsylvania have the responsibility to:
(1) Withhold Social Security, Medicare and Pennsylvania unemployment taxes from their employee’s paycheck each pay period.
(2) Pay the employer’s portion of Social Security and Medicare, as well as federal and Pennsylvania unemployment insurance taxes.
(3) File tax forms with the PA Department of Labor and Industry and the Department of Revenue.
(4) Prepare and file form REV 1667 with the Pennsylvania Department of Revenue, and prepare for W-2 and distribute to each employee, file Form W-2 Copy A and Form W-3 with the Social Security Administration and file Schedule H with your personal income tax return. Therefore, where you are privately paying for a care, it is important to consult with a tax professional.
Can a caregiver be reimbursed for out-of-pocket expenses?
Often a caregiver will incur out-of-pocket expenses, such as gas money to drive an individual to appointments or money for groceries for the individual. In the event that the caregiver expends any out-of-pocket monies during the performance of their duties, it is important for the family member or friend to keep itemized lists of those expenses, as well as to retain all receipts documenting the expenses. In the event that the Department of Human Services challenges the Caregiver Agreement, or the reimbursement of expenses, the itemization of your expenses may prove useful.
Do I need an elder law attorney to discuss the caregiver issues?
There are other numerous concerns with privately hiring a caregiver which include liability in the event that the caregiver is injured on the job, including medical expenses and disability payments.
Therefore, if you should decide to continue with a private caregiver you will need to consult with a tax professional to deal with the income tax concerns, consult with your homeowner’s insurance regarding liability issues, and consult with an elder law attorney to have a properly prepared caregiver agreement in place to outline the services to be provided and the payment for the services.
Want to learn more about a family caregiver agreement in Pennsylvania? Contact OWM Law elder law attorneys to discuss privately paying a family member for care. We have elder law attorneys that serve Montgomery, Chester, Berks County, and the greater Philadelphia area.
— Written by Rebecca A. Hobbs, Esq., CELA*
*Certified as an Elder Law Attorney by the National Elder Law Foundation as authorized by the Pennsylvania Supreme Court.
DISCLAIMER: The contents of this blog are not legal advice, and are not to be used for that purpose. If you are faced with a legal matter, you should contact a lawyer immediately in order to ensure that you are protected.