Is your income exempt from taxes as “difficulty of care payments”?
In 2014, the IRS issued Notice 2014-7, addressing the tax treatment of Worker payments from Medicaid-sponsored Home and Community-Based Services.
Under Notice 2014-7, payments for eligible Workers from a Medicaid program are now considered difficulty of care (DOC) payments, which are not federally taxable. Minnesota has elected to treat these payments similarly.
Depending on your funding source, you may be eligible to declare your income as DOC payments. If you qualify, please contact PICS Payroll for more information. We will adjust your federal and state income tax withholding to zero for all future eligible payments.
Common difficulty of care questions
1. How do I know if I am eligible to file my income as non-taxable DOC payments under Notice 2014-7?
Workers who are funded by a Medicaid service and live in the same home as the Participant may be eligible to declare their income as DOC payments. For more specific questions or concerns, contact a tax professional.
2. What services are Medicaid-sponsored?
PICS currently provides two Medicaid-sponsored services:
- Consumer Directed Community Supports (CDCS)
- Personal Supports & Respite (PSR)
Earnings from both services are eligible as DOC payments. Contact PICS if you have questions regarding your funding source.
3. I am a Worker and live with the Participant part time. Are my earnings eligible as DOC payments?
No, the Worker and Participant must live together full time and participate in typical daily acts of living such as shared meals and holidays.
4. If I declare my payments as non-taxable, do I still have to complete a W-4?
Yes, PICS requires a W-4 for all Workers. Any earnings that are not DOC payments are taxable, such as paid time off or payments from another funding source.
5. What will my W-2 look like?
If 100% of your earnings are considered DOC payments, you would receive a W-2 with a zero in box one (Wages, tips, other comp), box two (Federal income tax withheld) and box 16 (State wages, tips, etc.).
6. When does the declaration of DOC payments expire?
Your eligibility may expire when your circumstances or funding source changes. You are responsible for informing PICS if you are no longer eligible. Failure to do so could result in a bill from the IRS at tax time.
7. My income qualifies as DOC payments, but I already file exempt from taxes. Should I declare my income as DOC, too?
Claiming exempt status and declaring your income as DOC payments under Notice 2014-7 are different:
- If you claim exempt status, your income will be reported as taxable with zero taxes withheld.
- If you claim income as DOC payments, your income will not be reported as taxable and zero taxes will be withheld.
Contact a tax professional to discuss your situation.
Read more information from the IRS on Notice 2014-7
PICS cannot provide tax advice. Our ability to help you determining your eligibility is limited. Please consult a tax professional to get the best information for your unique situation.