It's that time of year once again to pay up or get back hard-earned money: tax time! As a professional caregiver, there are different ways to go about filing your taxes with Uncle Sam, and it depends on how you earned your wages. Sometimes you are paid by a family as a direct employee. Other times, you are employed by an agency and they handle your compensation. Insurance companies may even be the ones to compensate your wages as you are directly employed by a family. However you receive your compensation, filing your taxes needs to be done correctly. With a little know-how, you can do it with as little stress as possible.
Professional Caregivers Working with an Agency
The most common method is through the professional caregiver being a direct employee of an agency that handles payments and wages. In this case, you would receive your paycheck directly from your employment agency and not from the patient or the patient's family for whom you provide services. By the end of January, you should receive your W-2 statement that contains all the information needed to file your taxes with the IRS and state government. This will include all the earned income, any state or federal taxes you have already paid, as well as Social Security and Medicare withholdings.
Handling taxes while employed by an agency is one of the simplest ways to file your taxes. You can take your necessary documents and pay a CPA to file for you, or you can purchase DIY software to complete on your own.
Household Employer and Self-Employment
If you are a professional caregiver hired directly by a household, you will receive your wages directly from the family whose employment you are in. The family employer should withhold taxes and all other withholdings, such as Social Security and Medicare. At the end of the year, you should receive a 1099-MISC form, not a W-2 form, as is the case with an agency, from your employer. You need not worry about self-employment taxes in this case. Taxes would be filed in the same manner: either by CPA or DIY software.
The caregiver will owe self-employment tax...
In less common circumstances, a caregiver will be compensated by a state agency. If such a caregiver runs an adult day-care business for more than one client (a loved elderly one may be one such client), the caregiver will receive Form 1099-MISC from the state agency, with the amount paid shown. The caregiver will owe self-employment tax, and must report the state payment in full on Schedule C and Schedule SE.
Now let's say you are caring for a family member, but are also a self-employed professional caregiver that operates your own care giving business or adult day-care out of your home. If your family member is receiving care from you out of your home, you would then need to be hired as a professional and not compensated as a household employee would. Compensation would be through the insurance company on behalf of the family member's coverage. Even though you are a family caregiver for your own family member, you would still be considered a self-employed professional and need to report wages as such. In such less common cases as these, self-employment tax will be owed as payment to the IRS at the end of the year.
Out of Pocket Expenses
As a paid caregiver, you undoubtedly will incur additional expenses related to the competent services you provide. These out-of-pocket expenses can be deducted from your total gross income at the end of each tax year. Some commonly incurred expenses include:
As a professional caregiver, working in a community dwelling setting, the average out-of-pocket expenditure is $374 a month with an average of 68.2 hours of providing care per week. These expenses should be well documented and kept in a secure file. The best way to ensure the integrity of these receipts and statements is to scan and file them away on a computer with a backup method. These necessary documents can then be used to file your taxes annually.
Keeping accurate records will provide yourself with the information you need to get the most deductions on your taxes. It will also protect you in the event you ever get audited by the IRS. Some individuals keep a running spreadsheet throughout the year so that at tax time, you will already have your totals current for the year with no need to search for lost receipts. This makes calculating your taxes less stressful, which is something every caregiver can appreciate.
Caring for individuals means you give of yourself in every way: your time, talent, resources, and heart. It may seem difficult to separate your life and passion from your profession when you create relationships with the ones you care for and their families. However, keeping your finances in order throughout the year will ease the burden on you when tax season rolls around every year.
IRS. Family Caregivers and Self-Employment Tax. Available at www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Family-Caregivers-and-Self-Employment-Tax. Last Visited January 14, 2016.
Pfizer Inc. Quantifying Caregiver Out-of-Pocket Expenses and Time Spent Caregiving (2010). Available at http://www.kantarhealth.com/docs/publications-citations/icad-10-Alzheimers-caregiver-burden.pdf. Last Visited January 14, 2016.