In a very recent Chief Counsel Advisory, the Internal Revenue Service (“IRS”) clarified prior advisories and rulings regarding both the federal income and employment tax implications of payments made to and received by individuals for foster-home or difficulty-of-care services. In IRS Chief Counsel Advisory 202243009, 2022 WL 16551520 (Oct. 28, 2022), the IRS made it clear that although qualified payments received by individuals for providing qualified foster-home or difficulty-of-care services are not gross income to the payee, the payor is still responsible for the Federal Insurance Contributions Act (“FICA”) and the Federal Unemployment Tax Act (“FUTA”) employment taxes if there is an employer-employee relationship between the payor and payee, and no statutory exemption from employment tax obligations applies, such as the parent-child exemption. The IRS's 2022 advisory reads in pertinent part as follows:
The 2002 Field Service Advisory (FSA) stated in-home care payments to the service providers, whether related or not, are generally remuneration for employment. As such, the payments were subject to federal income tax as well as to FICA and FUTA taxes, unless there's an exception.
Notice 2014-7 reverses the conclusion for federal income tax purposes. Prior to Notice 2014-7, the IRS usually took the position the payments to care/service providers are includible in gross income. With Notice 2014-7, payments to service providers, including parents who receive payments from the Medicaid waiver program for the care of their child, are treated as difficulty of care payments under IRC § 131 and therefore excluded from gross income. As such, taxpayers are not required under IRC §§ 6041 or 6051 to report the payments as wages subject to income tax and income tax withholding.
However, the analysis and conclusions regarding the FICA and FUTA tax treatment of the payments described in the 2002 FSA and Notice 2014-7 have not changed. These payments are still generally subject to FICA and FUTA taxes, and therefore may be required to [be] reported under IRC § 6051, unless an exception applies.
Id. (emphasis added).
IRS Chief Counsel Advisory 202243009 and its predecessor rulings provide welcome relief from both income and employment taxes in cases involving qualified foster-home and difficulty-of-care payments and receipts, but makes it clear that in most cases, the payor must pay over to the federal government FICA and FUTA taxes unless a specific statutory exception applies, such as the “parent-child” exemption from employment taxes. For an additional summary of IRS Chief Counsel Advisory 2022433009, see RIA Federal Tax Update, 2022 WL 16550156 (Oct. 31, 2022) (Copyright © 2022 Thomson Reuters Tax and Accounting).