Are IHSS Wages Taxable in California? Live-In Rule and SOC 2298

IHSS wages in California are taxable unless you live in the same home as the person you care for. If you do live together, the IRS treats those payments as “difficulty of care” income under Notice 2014-7 and excludes them from both federal and California state gross income.¹ If you don’t live with your recipient, the wages are fully taxable like any other paycheck. That single question, where you live, drives almost every tax consequence that follows.

The Live-In Requirement

California’s In-Home Supportive Services program operates under a Medicaid Home and Community-Based Services waiver, which is what brings it inside Notice 2014-7. The exclusion covers payments for nonmedical personal and domestic care, which is what IHSS authorizes.² The exclusion applies only when the provider and the recipient share the same home. Your relationship to the recipient doesn’t matter; parent, spouse, adult child, or unrelated all qualify on the same terms.³

The IRS defines your home as the place where you actually reside and carry out the routines of your private life, like sharing meals and spending holidays with family.³ Move into the recipient’s home without keeping a separate residence and that home becomes yours for the exclusion. Provide care five days a week, sleep there four nights, and return to your own place on weekends? You don’t qualify. Maintaining an apartment and commuting to care for someone, even with occasional overnights, also fails the test.

Filing the SOC 2298 to Stop the Withholding

Living with your recipient isn’t enough on its own. You also have to tell the California Department of Social Services about the arrangement by submitting the Live-In Self-Certification Form (SOC 2298).⁴ Once CDSS processes it, your IHSS wages stop showing up as taxable income on your W-2.

You file the form once. The exclusion carries forward each year for as long as you keep working for, and living with, the same recipient.⁴ If you move out, notify CDSS so withholding resumes.

One limit worth understanding upfront: the SOC 2298 only changes federal and state income tax withholding. It doesn’t touch Social Security, Medicare, or other payroll taxes.⁴

California State Income Tax

California follows the federal rule. The Franchise Tax Board confirms that IHSS or Medicaid waiver income you receive for caring for someone you live with is excluded from your California adjusted gross income.⁵ If it’s excluded federally, it’s excluded at the state level. A live-in provider who has filed the SOC 2298 owes no income tax on IHSS wages at either level.

Social Security, Medicare, and Other Payroll Taxes Still Apply

Income tax and payroll tax are separate systems. Even with excluded wages, FICA generally still applies.⁴

For 2026, FICA kicks in when a household employer pays $3,000 or more in cash wages during the calendar year. At that point Social Security tax at 6.2% and Medicare tax at 1.45% apply, with employer and employee each paying a matching share.⁶ Most IHSS providers clear that threshold easily, so FICA will show up on your paychecks regardless of your living situation.

Family relationships change the calculation. Federal unemployment tax (FUTA) generally applies to the first $7,000 of wages if the household employer paid more than $1,000 in any quarter, but wages paid to a spouse, a child under 21, or a parent are exempt from FUTA entirely.⁷ The federal FICA statute contains parallel exemptions: services performed by a child under 21 for a parent, or by a person for their spouse, are excluded from covered employment.⁸ A large share of IHSS providers care for family members, so these exemptions matter.

California State Disability Insurance is withheld from IHSS wages for qualifying providers, and the live-in certification does not affect SDI withholding.⁹

Excluded Wages Still Count for the EITC and Child Tax Credit

Here’s the piece that surprises people. Even though excluded IHSS wages are off your gross income, you can still count them as earned income when figuring the federal Earned Income Credit and the Additional Child Tax Credit. The IRS conceded this after losing Feigh v. Commissioner, where the Tax Court held that payments don’t lose their “earned income” status just because Notice 2014-7 excludes them.¹⁰

The election is all-or-nothing: include the full amount of your excluded Medicaid waiver payments as earned income, or include none of it.³ For a live-in provider with children and modest income, opting in can pull in thousands of dollars in refundable credits on wages that owe zero income tax.

California mirrors this for the CalEITC. The Franchise Tax Board confirms that IHSS income excluded from gross income can still be counted as earned income for the California Earned Income Tax Credit.⁵ Qualifying providers can potentially claim both the federal and state credits on the same excluded wages.

Retirement Account Contributions

Before 2020, a live-in provider who excluded all their IHSS wages had no “compensation” on paper and couldn’t contribute to a Traditional or Roth IRA. The SECURE Act of 2019 fixed that. Section 116 of the law amended the Internal Revenue Code to treat difficulty of care payments excluded under Section 131 as compensation for IRA contribution purposes. If IHSS wages are your only income and you’re excluding them, you can still use those wages to determine your IRA contribution limit. For 2026, that means up to $7,000, or $8,000 if you’re 50 or older, provided your excluded wages equal or exceed the amount contributed.

Reading Your W-2

Every provider gets a W-2, taxable wages or not. What changes is how the boxes are filled. If your SOC 2298 has been processed, Box 1 (federal wages) should show $0, and Box 16 (state wages) should also show $0. The full excluded amount appears in Box 12 with code II, which marks Medicaid waiver payments excluded under Notice 2014-7.⁴

Boxes 3 and 5 (Social Security and Medicare wages) will still show amounts. That’s expected; the income tax exclusion doesn’t reach payroll taxes.

If the W-2 Is Wrong

Sometimes the SOC 2298 isn’t processed before W-2s go out, and wages land in Box 1 that shouldn’t be there. You still claim the exclusion on your return. Report the Box 1 amount on the Form 1040 wage line, then subtract the excludable portion on Schedule 1 to zero it out.³ CDSS will not amend W-2s for wages paid before your self-certification was processed.⁴

If Box 12 is missing code II, the employer (the State, through the IHSS payroll system) should issue a corrected W-2 or Form W-2c. IRS instructions require code II in Box 12 for excluded Medicaid waiver payments.¹¹ If you can’t get the form corrected, attach a written explanation and keep documentation of your live-in status.

Reporting When You Elect Earned Income for Credits

If you’re electing to count excluded wages as earned income for the EIC or ACTC, the sequence matters. Report the Box 1 amount on Form 1040 line 1a and the Box 12 code II amount on line 1d. Then on Schedule 1 line 8s, enter the total nontaxable Medicaid waiver payment as a negative number in the preprinted parentheses.³ That keeps the wages out of taxable income while making them count toward the credits.

Refunds for Prior Years

If you were a live-in provider in earlier years and paid tax on wages that should have been excluded, file Form 1040-X to claim a refund. The deadline is three years from the date you filed the original return or two years from when you paid the tax, whichever is later.³

To keep the amended return moving, the IRS suggests including:

The care recipient’s name and, if available, Social Security number.
Proof you shared a residence during the tax year, such as a driver’s license, bank statement, utility bill, or government-issued document listing the same address.
Evidence that the recipient was enrolled in a state Medicaid waiver program.

In Part III of Form 1040-X, explain that the payments are excludable under Notice 2014-7. Excluding income in an earlier year can affect deductions or credits you originally claimed, so the refund isn’t always the full tax paid on those wages.³

1
Internal Revenue Service. IRS Notice 2014-7 – Difficulty of Care Payments
2
California Department of Social Services. In-Home Supportive Services Program Overview
3
Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income
4
California Department of Social Services. Live-In Provider Self-Certification Information
5
Franchise Tax Board. In-Home Supportive Services
6
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
7
Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees
8
Office of the Law Revision Counsel. 26 U.S. Code 3121 – Definitions
9
Department of Social Services. In Home Supportive Services Program
10
Internal Revenue Service. Action on Decision – Feigh v. Commissioner
11
Internal Revenue Service. General Instructions for Forms W-2 and W-3