Is IHSS Income Tax Exempt? Live-In Rule and How to Report

IHSS income is exempt from federal income tax when the caregiver and the person receiving care live in the same home. That rule comes from IRS Notice 2014-7, which treats these Medicaid waiver payments as “difficulty of care” income under Section 131 of the Internal Revenue Code.¹ California follows the same treatment for state income tax.² If you don’t share a home with the recipient, your IHSS wages are taxable like any other wages.

The Live-In Rule Is What Matters

You do not need to be related to the person you care for. Notice 2014-7 applies “whether the care provider is related or unrelated to the eligible individual.”¹ A parent, an adult child, a spouse, a friend, or a hired caregiver can all qualify on equal footing.

What actually determines the exclusion is three conditions, all of which have to be true:

The payments come from a state program operating under a Section 1915(c) Medicaid Home and Community-Based Services waiver. California’s IHSS program qualifies.
The services are personal care or domestic support, not medical treatment.
The care recipient lives in your home.

The third condition does most of the work. The IRS defines your home as the place where you live and regularly carry out the routines of your private life, such as sharing meals and holidays with family.³ The recipient must live in that same home. Traveling to a client’s residence to provide services, even if you sleep there several nights a week, doesn’t meet the test if your private life is centered somewhere else.

If the IRS ever questions your exclusion, expect to show documentation that you and the recipient shared an address for the tax year: a driver’s license or government ID, bank statements, medical or utility bills, or social agency records all work.³ Keep proof that the recipient is enrolled in a Medicaid waiver program as well.

Filing the Live-In Self-Certification in California

California caregivers can make the exclusion automatic going forward by filing the Live-In Self-Certification Form (SOC 2298) with the California Department of Social Services. Once the state processes it, IHSS wages stop appearing in Box 1 of your W-2 for federal and state income tax purposes.² That removes the need to make manual adjustments on your return every year.

The SOC 2298 only affects income tax withholding. It doesn’t change Social Security or Medicare withholding, which follow separate rules.²

How to Report Exempt IHSS Payments on Your Return

The reporting depends on the form you receive and how it’s filled out.

W-2 With Box 12 Code II

Many states now report excludable Medicaid waiver payments in Box 12 using Code II rather than including them in Box 1. If Box 1 is blank or zero and you aren’t electing to count the payments toward tax credits, you do not need to report the W-2 amounts on your return.³

W-2 With the Exempt Amount Still in Box 1

Some agencies haven’t updated their systems. If the exempt wages still appear in Box 1, put the Box 1 amount on Form 1040, line 1a, and any Box 12 Code II amount on line 1d. Then enter the nontaxable total as a negative number on Schedule 1 (Form 1040), line 8s, in the preprinted parentheses. That line is designated for nontaxable Medicaid waiver payments, and the negative entry zeroes out the exempt wages.³

1099-NEC

If you receive a 1099-NEC and you aren’t running a home care business, enter the amount on Form 1040, line 1d, and offset it with a negative entry on Schedule 1, line 8s. Because the payments are excludable and you’re not in a trade or business, they aren’t subject to self-employment tax either.³

If you are a sole proprietor with a home care business, include the full 1099-NEC amount as income on Schedule C, line 1. Then report the excludable amount as an expense in Part V (Other Expenses) and write “Notice 2014-7” next to the entry. The net effect is the same: no income tax and no self-employment tax on the excluded payments.³

When IHSS Payments Are Taxable

If you don’t live with the care recipient, the exclusion doesn’t apply. There is no partial exclusion for spending most of your time at the recipient’s home. The shared-residence test is binary.

Taxable IHSS wages are reported like any other job. Most IHSS caregivers are treated as employees and receive a W-2 with income tax, Social Security, and Medicare withheld. If you’re classified as an independent contractor, you’ll receive a 1099-NEC, report the income on Schedule C, and pay self-employment tax on Schedule SE.⁴

Social Security and Medicare Are a Separate Question

Income tax exemption under Notice 2014-7 does not automatically exempt IHSS payments from Social Security and Medicare (FICA) taxes.¹ FICA follows household-employment rules, and the exemptions there are based on family relationship, not on where you live.

You don’t owe Social Security or Medicare tax on wages paid to:

Your spouse
Your child under age 21
Your parent, with an exception if the parent cares for your child under 18 and you are divorced, widowed, or living with a spouse who cannot provide care due to a physical or mental condition

These family exemptions apply regardless of how much you earn. For caregivers outside those categories, FICA applies once cash wages from the household employer reach $3,000 or more in 2026.⁵

If FICA was withheld from wages that should have been exempt under the family relationship rules, ask the employer to correct the overcollection first. If the employer won’t fix it, file Form 843, Claim for Refund and Request for Abatement, with the IRS. Attach a copy of the W-2 and a statement explaining why the employer wouldn’t adjust it.⁶

Recovering Income Tax You Already Paid

If you paid federal income tax on live-in IHSS wages in prior years, file Form 1040-X to amend those returns. You generally have three years from the original due date of the return or two years from the date you paid the tax, whichever is later.⁷

Note on the amended return that the income change results from Notice 2014-7. Include documents showing you shared a home with the care recipient and evidence of Medicaid waiver enrollment for the year at issue.³

Excluded Payments Can Still Count for Tax Credits and IRAs

Even though live-in IHSS wages are excluded from taxable income, you can choose to count them as earned income for the Earned Income Tax Credit and the Additional Child Tax Credit. The choice is all-or-nothing for each tax year; you include all your excludable Medicaid waiver payments or none.³ For caregivers with low or moderate income, this election can be worth thousands. Run the numbers both ways before filing. If you’re amending a prior year to remove IHSS income from your taxable wages, check whether electing earned-income treatment for that year would produce a larger EITC or ACTC refund.⁷

The SECURE Act of 2019 also treats these excludable payments as compensation for IRA contribution purposes. Section 116 of the Act lets caregivers whose only income is excluded under Section 131 contribute to an IRA up to the standard annual limit, which they could not do before.

1
Internal Revenue Service. Notice 2014-7
2
California Department of Social Services. Live-In Provider Self-Certification Information
3
Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income
4
Internal Revenue Service. Form 1099-NEC and Independent Contractors
5
Internal Revenue Service. Publication 926 (2026), Household Employers Tax Guide
6
Internal Revenue Service. Instructions for Form 843, Claim for Refund and Request for Abatement
7
Taxpayer Advocate Service. Certain Medicaid Waiver Payments May Be Excludable From Income