LTC Claims: NEED TO KNOW FOR CAREGIVERS – Indemnity vs. Reimbursement
Many times I am asked, as an LTC specialist, which type of LTCi policy is best for clients at claim time. Indemnity or Reimbursement?
The debate is never easy as both have pros and cons. If you take 3 minutes to read below you may find some very enlightening information related to how caregivers are required to file their taxes when paid by family members. If you want to scan, please look at the red highlighted areas.
Please read here for the entire article – https://srcarecenter.com/finances/the-ultimate-2021-tax-guide-for-caregivers/.
It really comes down to the difference between an Independent Caregiver (1099) vs. Household Employee (W-2)
Below are the excerpts I found very enlightening:
“Independent Caregivers (1099) VS. Household Employees (W-2)
There are two main types of caregivers: independent caregivers and household employees.
If you are a caregiver for your parent or another elderly loved one and are not being paid for your time, you are an independent caregiver. This also applies to caregivers who are paid less than $2,100 per year. If you are a caregiver that is paid more than $2,100 per year, you are considered a household employee.
If a family has hired you to be a caregiver for their loved one and are paying you more than $2,100, you are officially their employee, and they will take on all responsibilities of being an employer. These responsibilities include payroll and taxes.
The main difference between independent caregivers and household employees is who has control over the caregiver’s time. If you have control over what hours you work and the activities and services you provide, you are most likely an independent caregiver. If an employer hires you and controls your work hours, activities, and procedures, you are a household employee.
When filing taxes, independent caregivers will file Form 1099 to summarize payments they’ve received throughout the year as well as all taxes they’ve paid to the IRS. Household employees will file a personal income tax return using Form W-2. This shows wages earned and the taxes your employer withheld from you throughout the year.
Failing to properly classify as the right type of caregiver could result in you being audited and possibly being required to pay additional back taxes and fines. You can learn more about household employer taxes by reading Publication 926 from the IRS.
How To File Taxes As An Independent Caregiver
Depending on your situation, there are different ways in which you will file taxes as an independent caregiver. In the case that you are caring for a loved one and are being compensated for your time and energy through a trust, Medicaid, life insurance, long-term care insurance, or another form of income, you will need to file Form 1040 or 1040-SR.
In this case, you are not considered self-employed or an employee of a business providing senior care. However, this income is still taxable but is not subject to self-employment tax. You will need to report this income on line 21 of Form 1040.
Many adults wonder if they can get paid for the time they spend caring for their elderly parents. You can learn about the different ways you could get paid by reading Programs that Pay Children to Care for their Aging Parents.
Make sure you keep track of all income and expenses you incur as a caregiver. This will help you with itemized deductions if you choose to go that route.
Suppose you are a caregiver who acts as an independent contractor (i.e., you set your own hours and control the services you provide). In that case, you will need to file a Form 1099 to summarize the payments you have received throughout the year and the taxes you have paid to the IRS.
As an independent contractor who files a Form 1099, you have to pay twice as much in Social Security and Medicare taxes compared to a household employee.
How To File Taxes As A Household Employee
To file taxes as a household employee, first, understand that you are an employee. This means that your employer has a set of rules from the IRS and the state that they must follow. These rules mostly hold the family that hired you responsible for withholding federal income taxes, state income taxes, and Social Security and Medicare taxes.
A benefit that comes with being a household employee is 7.65% of your gross wages are withheld while your employer pays a matching 7.65% to the IRS. In comparison, independent caregivers have to pay the full 15.3% because they are self-employed.
When you are hired, your employer should give you a Form W-4 and a state withholding form if you live in a state with income taxes. If they do not give you this form, be sure to request it from them. This form determines how much in income taxes should be withheld each pay period. This amount is determined by what you claim when you fill the form out.
As you work for your employer, be sure to keep track of your hours and pay. Your employer should do this as well, but it is a good idea to keep track of this information. You should be given a pay stub for each pay period, which shows your gross pay, net pay, and the taxes withheld.
If you earned more than $2,300 during 2020, your employer should send you a Form W-2. This shows all the taxes they paid on your behalf. You will use this form to assist you in filling out your personal income tax return.”
I hope you found it helpful and please remind any clients paying their family members to take care of them of these guidelines. Thank you
P.S. – Reimbursement policies are not subject to these rules because expenses are paid once they are incurred and up to the policy LTC monthly/daily limits.