Caregiver pay in Indiana is tax-free only when it comes through a Medicaid Home and Community-Based Services waiver and the person you care for lives in your home. In that situation, the money is excluded from federal gross income under IRS Notice 2014-7, and because Indiana starts its state and county tax calculation from your federal adjusted gross income, the exclusion carries over automatically. Caregiving paid directly by a family, without a Medicaid waiver, is fully taxable as wages.
When Medicaid Waiver Pay Is Tax-Free
IRS Notice 2014-7, issued in January 2014, treats payments made under a state Medicaid Home and Community-Based Services waiver as difficulty of care payments excludable under Section 131 of the Internal Revenue Code. If a state pays you through one of these waivers to care for someone who lives in your home, that money is not part of your gross income for federal tax purposes.1Internal Revenue Service. Notice 2014-7
The shared-home requirement is the condition that catches people out. The care recipient must live in the caregiver’s home under their plan of care. If you provide care to someone in their own home and you don’t live there, the exclusion does not apply.2Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income Family relationship is not the test. A parent caring for an adult child, an adult child caring for a parent, and an unrelated caregiver sharing a household all qualify on the same terms.
In Indiana, the programs that typically qualify include the Aged and Disabled Waiver and the Structured Family Caregiving program. The Indiana Family and Social Services Administration identifies Structured Family Caregiving payments as HCBS waiver income and requires verification that the income is excludable under Notice 2014-7 or Section 131.3Indiana Family and Social Services Administration. Structured Family Caregiving
How Indiana State and County Tax Follow the Federal Rule
Indiana calculates its state income tax by starting with your federal adjusted gross income. Under Indiana Code 6-3-1-3.5, the state begins with the AGI figure from your federal Form 1040 and then applies specific modifications.4Indiana Department of Revenue. Indiana Code 6-3-1-3.5 – Adjusted Gross Income Tax Difficulty of care payments excluded under Notice 2014-7 never appear in your federal AGI, and Indiana does not list them among the items that must be added back.
Indiana’s flat individual income tax rate for 2026 is 2.95%.5Indiana Department of Revenue. Rates, Fees and Penalties County taxes work the same way. All 92 Indiana counties levy a local income tax, and the AGI used for local tax purposes is your Indiana adjusted gross income.6Indiana Department of Revenue. General Information on Local Income Taxes County rates range from about 0.5% to over 3%. If the payments are out of federal AGI, they’re out of the state and county tax base too.
Claiming the EITC on Excluded Waiver Pay
Even though Medicaid waiver payments are excluded from gross income, the IRS allows you to treat them as earned income when claiming the Earned Income Tax Credit and the Additional Child Tax Credit. The agency adopted this position after the Tax Court’s decision in Feigh v. Commissioner.7Internal Revenue Service. Action on Decision – Feigh v. Commissioner The election can be worth thousands. A caregiver with $25,000 in waiver payments and two qualifying children can owe no income tax on the pay and still receive a substantial refundable credit.
There is a trade-off. When you exclude the payments and pay no Social Security or self-employment tax on them, those earnings don’t count toward your Social Security work credits. Over a long caregiving career, that can reduce your future retirement and disability benefits.
Private-Pay Caregiving Is Fully Taxable
When a family hires a caregiver directly, without going through a Medicaid waiver, the arrangement is household employment and the pay is ordinary taxable wages. For 2026, if a family pays a caregiver $3,000 or more in cash wages during the year, the family must withhold and pay Social Security and Medicare taxes. The combined rate is 7.65% from the employee’s wages, with a matching 7.65% from the employer.8Internal Revenue Service. Publication 926 – Household Employer’s Tax Guide The wages are also subject to Indiana’s 2.95% state income tax and the applicable county tax.5Indiana Department of Revenue. Rates, Fees and Penalties
Caregivers hired directly by a family are almost always employees, not independent contractors. The family typically controls when and how the work is done, which is the core test for employee status.9Internal Revenue Service. Worker Classification 101 – Employee or Independent Contractor On the upside, private-pay caregivers build Social Security credits and can qualify for unemployment benefits if the job ends.
Minimum Wage and Overtime
Private-pay caregivers are covered by the Fair Labor Standards Act. They must be paid at least the federal minimum wage of $7.25 per hour for all hours worked, and overtime at one and a half times their regular rate for hours beyond 40 in a workweek.10United States Department of Labor. Fact Sheet 79B – Live-in Domestic Service Workers Under the Fair Labor Standards Act One narrow exception: live-in caregivers employed directly by a family (not through an agency) who reside on the premises for five or more days per week can be exempt from overtime, though the family must still track all hours worked.
How to Report Caregiver Pay on Your Return
How you report Medicaid waiver pay depends on the tax form, if any, you received.
W-2 Reporting
Some fiscal intermediaries issue a W-2 that includes excludable Medicaid waiver payments. Nontaxable payments may appear in Box 12 with Code II rather than in Box 1. If Box 1 is blank or zero and you’re not electing to count the payments as earned income for credit purposes, you don’t need to report the W-2 at all. If Box 1 shows an amount, report it on Form 1040, line 1a, and any Box 12 Code II amount on line 1d. Then on Schedule 1 (Form 1040), line 8s, enter the total nontaxable amount as a negative number to back it out of AGI.2Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income
1099 Reporting
If you received a Form 1099-NEC or 1099-MISC and you’re not a sole proprietor, enter the payments on Form 1040, line 1d, then enter the nontaxable amount on Schedule 1, line 8s as a negative number. If you are a sole proprietor, include the full amount on Schedule C, line 1, and deduct the nontaxable portion in Part V (Other Expenses) with the notation “Notice 2014-7.”2Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income
Indiana IT-40
Your Indiana Form IT-40 begins on line 1 with the adjusted gross income from line 11 of your federal Form 1040.11Indiana Department of Revenue. Your Indiana Tax Return Line By Line Because the federal exclusion already reduced that number, no separate step is needed on the Indiana return.
Amending Past Returns
If you reported Medicaid waiver payments as taxable in a prior year and paid tax on them, you can file an amended federal return on Form 1040-X citing Notice 2014-7, then amend your Indiana return to recover the state and county tax. Keep copies of your care plan, proof of shared residence, and payment records with your return.