Certain payments that a taxpayer receives from certain state agencies, the foster care system, or Medicaid for caring for someone living in their home under a state's Medicaid waiver program may be excluded from the taxpayer's income as provided in Notice 2014-7. These Medicaid waiver payments may be excluded from the taxpayer's income whether or not the taxpayer is related to the eligible individual receiving the care.
Such payments may be reported to the taxpayer on Form 1099-MISC, 1099-NEC, or Form W-2 depending upon the issuing state agency. How they are entered in the return will vary depending on the form:
- If the payment is reported to the taxpayer on Form W-2, the amount reported in Box 1 of the W-2 is reported on Line 1 of the 1040 as part of the taxpayer's "Wages, salaries, tips, etc.", and then the non-taxable amount is subtracted as "Other Income" on Schedule 1 notated "Notice 2014-7".
- If the payment is reported to the taxpayer on Form 1099-MISC, the taxpayer must report the income on Schedule C if providing home health care is their business. Otherwise, they can report the payment and exclusion on either Schedule 1, with both the payment and the exclusion under Other Income, or on Schedule C, with the payment in Gross Receipts and the excludable amount in "Other expense" notated “Notice 2014-7”.
If the taxpayer is not in the business of providing home health care, regardless of how the Medicaid Waiver Payments are reported they are ultimately excludable from income. They are not self-employment income and thus are not subject to self-employment tax, however as a result of the tax court ruling in Feigh v. Commissioner in 2019, Medicaid waiver payments may be considered earned income for the purposes of the Earned Income Credit and the Additional Child Tax Credit. See IRB 2020-14 for more information.
Note: If the W-2 does not include an amount in Box 1, enter the amount in the Box 1 entry field anyway and follow the procedure below.
Form W-2
To enter Medicaid Waiver Payments reported on Form W-2 in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Income
- Wages, Salaries, Tips (W-2)
- New - Enter the W-2. Note: If Box 1 is blank, enter the Medicaid Waiver Payment in Box 1 anyway.
- Box e, Medicaid Waiver Payment in Box 1 - Enter the Box 1 amount.
Indicating the payment in Box e creates the subtraction in Schedule 1 notated "Notice 2014-7".
Upon exiting the W-2 entry window you will be asked "Do you want to include Medicaid Waiver Payments in the calculation of Earned Income?" Answer YES to include these payments in the EIC and ACTC earned income calculation.
Form 1099-MISC
To enter Medicaid Waiver Payments reported on Form 1099-MISC in Box 3 in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Income
- Form 1099-MISC / 1099-NEC
- New - Select Form 1099-MISC.
- Enter the 1099-MISC just as it is.
- Click the Link check box in Box 3 if reporting the payment on Schedule C.
- Box e, Medicaid Waiver Payment - Enter the Box 3 amount.
Upon exiting the 1099-MISC entry window you will be asked "Do you want to include Medicaid Waiver Payments in the calculation of Earned Income?" Answer YES to include these payments in the EIC and ACTC earned income calculation.
If you clicked the "Link" check box:
- You will also be asked, "Would you like to link this Form 1099-MISC to a Schedule?". Answer YES, then select Schedule C.
- If you already have a Schedule C created for Medicaid Waiver Payments, select it, otherwise select New Schedule C and go through the process of creating the Schedule C. (See our knowledgebase article here if you are unfamiliar with the process.)
Form 1099-NEC
To enter Medicaid Waiver Payments reported on Form 1099-NEC in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Income
- Form 1099-MISC / 1099-NEC
- New - Select Form 1099-NEC and enter the 1099-NEC just as it is.
- Box e, Medicaid Waiver Payment - Enter the Box 1 amount.
Upon exiting the 1099-NEC entry window you will be asked "Do you want to include Medicaid Waiver Payments in the calculation of Earned Income?" Answer YES to include these payments in the EIC and ACTC earned income calculation.
You will also be asked, "Would you like to link this Form 1099-NEC to a Schedule?". Answer YES, then select Schedule C. If you already have a Schedule C created for Medicaid Waiver Payments, select it, otherwise select New Schedule C and go through the process of creating the Schedule C. (See our knowledgebase article here if you are unfamiliar with the process.)
Note: This is a guide on entering Medicaid Waiver Payments into the TaxSlayer Pro program. It is not intended as tax advice.
Additional Information:
IRS: Instructions for Form 1040