If you work as a caregiver in New York’s Consumer Directed Personal Assistance Program and live in the same home as the person you care for, your wages are not subject to federal income tax. That is the heart of the CDPAP tax exemption: IRS Notice 2014-7 treats qualifying Medicaid waiver payments as “difficulty of care” payments under Section 131 of the Internal Revenue Code, so they are excluded from your gross income.1Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income Spouses and parents caring for a family member may also be exempt from Social Security and Medicare taxes under a separate rule. The two exemptions have different conditions, and both depend on paperwork you have to keep current.
Who Qualifies for the Income Tax Exclusion
Notice 2014-7 does not mention CDPAP by name. It covers payments made under any state Medicaid Home and Community-Based Services waiver program described in Section 1915(c) of the Social Security Act, and CDPAP falls under that umbrella.2Internal Revenue Service. Internal Revenue Service Notice 2014-7 The rule is simple at its center: if the caregiver and the consumer share a home, the caregiver’s Medicaid waiver payments are excluded from income. The exclusion applies whether or not you are related to the consumer, and the payments must be for nonmedical support like bathing, dressing, cooking, and similar daily help delivered under the consumer’s plan of care.3Internal Revenue Service. Internal Revenue Bulletin 2014-4
The exclusion is not optional. If you meet the criteria, the income has to be excluded; you cannot choose to treat it as taxable wages because it feels simpler at filing time.
The Shared-Residence Requirement
Everything turns on whether you actually live with the consumer. The IRS looks at where you sleep and keep your life on a regular basis. If you maintain a separate apartment or house, even part-time, the exclusion falls apart and the wages become ordinary taxable income.
Short absences do not disqualify you. Trips, vacations, and hospital stays generally do not break shared-residence status as long as the home remains your principal residence throughout. Consistency is what matters. Your driver’s license, mail, utility accounts, and daily routine should all point to the same address as the consumer. Trouble starts when a caregiver gradually shifts to a new address without updating their tax status, which creates a mismatch that can lead to back taxes and penalties.
FICA Exemptions for Family Caregivers
Income tax and FICA are separate questions. Even when your CDPAP income is excluded from income tax, Social Security and Medicare taxes may still apply. The combined FICA rate is 7.65%, split between Social Security at 6.2% and Medicare at 1.45%, so the difference is real money.
Section 3121 of the Internal Revenue Code exempts certain family-based domestic work from FICA. Wages for domestic service in a private home are not subject to FICA when the caregiver is:4Office of the Law Revision Counsel. 26 U.S.C. 3121 – Definitions
- The consumer’s spouse.
- The consumer’s child under age 21.
- The consumer’s parent, with narrow exceptions when the consumer is a single parent with a young dependent in the home.
Siblings, adult children age 21 and older, and unrelated caregivers do not qualify for the FICA exemption. They owe the full 7.65% even when their income is excluded under Notice 2014-7. Employers must still report wages on Form W-2 for exempt family members, even when no FICA is withheld.5Internal Revenue Service. Tax Situations When Taking Care of a Family Member
What CDPAP Pay Does Not Qualify
Not every dollar from CDPAP is automatically excluded. The exclusion covers Medicaid waiver payments for in-home care under the consumer’s plan of care. Several categories fall outside it:
- Vacation pay and bonuses above the standard Medicaid waiver rate.
- Care delivered outside the shared home, such as time spent accompanying the consumer to appointments or activities elsewhere.
- Care for anyone who does not live in your home, regardless of your relationship to them.
Paperwork You Need to File
Your fiscal intermediary is the organization that handles CDPAP payroll and the one that actually stops withholding income tax from your checks. They need proof that you meet the shared-residence requirement before changing anything. Expect to provide:
- Government-issued photo ID showing the same address as the consumer.
- Residency proof such as utility bills in your name at the shared address, a lease listing you as a tenant, or a mortgage statement.
- An attestation of shared residency, usually on the fiscal intermediary’s own form, certifying when you began living with the consumer and listing your Social Security number and the consumer’s Medicaid ID.
You also have to update your Form W-4. If all your income is excluded under Notice 2014-7 and you had no tax liability last year and expect none this year, you can claim “exempt” on the W-4 to stop federal income tax withholding entirely. The catch is timing: an exempt W-4 is only valid for the calendar year in which you file it. You must submit a new exempt W-4 by February 15 each year, or your fiscal intermediary is required to begin withholding as if you were single with no adjustments.6Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate Put the date on your calendar. Miss it and taxes come out of your checks until you file a new W-4, and the fiscal intermediary will not refund what was already withheld.
How to Report Excluded Income on Your Return
The IRS still expects to see the income on your return. Your fiscal intermediary will issue a W-2 for your total wages, and ignoring it creates a mismatch that invites an IRS notice.
Report the full W-2 amount on Form 1040, line 1a, the way you would with any other job. Then on Schedule 1 (Additional Income and Adjustments to Income), enter the nontaxable amount on line 8s, which is labeled for Medicaid waiver payments excluded from income.7Internal Revenue Service. Schedule 1 Form 1040 Additional Income and Adjustments to Income The line 8s amount appears in parentheses, which tells the IRS to subtract it from your taxable income. The two entries cancel out: the wages are documented for purposes like loan applications, and your tax liability on them stays at zero. Older guidance suggested writing “IRS Notice 2014-7” next to the entry, but the dedicated line 8s makes that unnecessary.
Refunds for Past Years
If you paid federal income tax on CDPAP wages in earlier years while you were living with the consumer, you can file an amended return to get those taxes back. Notice 2014-7 took effect January 3, 2014, so any qualifying wages earned from that date forward were eligible for the exclusion even if you did not claim it then.3Internal Revenue Service. Internal Revenue Bulletin 2014-4
The deadline for claiming a refund is three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later. Use Form 1040-X for each year, include the same Schedule 1 adjustment, and attach a short explanation referencing Notice 2014-7. For a full-time live-in caregiver, several years of back refunds can add up to a substantial amount.
You Can Still Claim the Earned Income Tax Credit
Excluded Medicaid waiver payments still count as earned income for the Earned Income Tax Credit. The IRS lists “Medicaid waiver payments excluded from income on Schedule 1” as a type of earned income for EITC purposes.8Internal Revenue Service. Earned Income and Earned Income Tax Credit (EITC) Tables You can exclude the wages from tax and use the same wages to qualify for a refundable credit worth up to several thousand dollars.
For tax year 2025, the AGI limits run from $19,104 for a single filer with no children to $68,675 for a married couple filing jointly with three or more children.8Internal Revenue Service. Earned Income and Earned Income Tax Credit (EITC) Tables The 2026 thresholds had not been published at the time of writing but are adjusted annually for inflation. If you qualify, the EITC can produce a net refund even though the underlying CDPAP income is not taxed, which makes filing a return worthwhile.
A Note on State Income Tax
Notice 2014-7 is a federal rule. Whether your state follows it depends on state tax law, and not every state automatically conforms to every IRS notice. New York generally follows federal treatment of Medicaid waiver payments, but a state that does not conform could tax income the IRS excludes. If you are unsure how your state treats these payments, check with your state tax agency or a tax professional before filing.