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Posted July 9, 2009

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Taxes: Logic, Tax Code and Caregiver Contracts

Q. My sibling lives with our parents. They are drawing up a caregiver agreement. They would like to do this as a 1099 scenario where the caregiver is an independent contractor who is responsible for their own FICA.  Yet, everything I read seems to indicate that the arrangement must be treated as a W-2 situation (my fingers are sore from Googling this!). 

My sibling has experience as a 1099 and well-understands the forms and the rules, as do I. There is nothing scary about a 1099, and the Feds will get their FICA. We think that the paperwork, etc., would be easier to deal with, if we could just do this under a 1099.  

I find it very hard to believe that we can't do this as a 1099. Are we naive, or does the naiveté lie with the gazillion posts out there that suggest a W-2 is mandatory and non-negotiable for FICA purposes? Thank you in advance for your response. 

R.J., Colorado Springs, Colorado.

A. You make a logical and sensible point regarding the FICA tax that the IRS would collect from you as an independent contractor, or collect part from you and part from your parent(s) if you were an employee. However, logic and the tax code do not always coincide.  

The federal tests for being an independent contractor are based on facts and circumstances, and they differ for each situation, with even the facts weighted differently depending on the circumstances. Additionally, an independent contractor must be in a trade or business to make a profit. This may not fit your situation, unless you are also caring for other people beside your parents.  

The IRS favors the employee/employer relationship because it generally can collect more tax revenue that way.  This is due to both the reporting required and the fact that few or no deductions reduce the reported income of an employee.  An independent contractor often will be able to deduct allowable business expenses before computing the FICA tax.  Now that there is the Schedule H included with a taxpayer's Form 1040, it is easier to report and pay the federal taxes for a household employee (i.e., caregiver). However, a taxpayer must still deal with any state unemployment tax and worker's compensation reporting.

There are a number of other considerations before deciding which path to take.  First, states have their own definition of independent contractor, and these can be stricter than the IRS version.  For example, Maryland recently passed "The Workplace Fraud Act of 2009" specifically targeting certain industries that employ independent contractors.  It gives the state the right to go into the business and decide whether the workers are misclassified and should be employees.  Then there are accompanying fines and penalties for the misclassification.  This law extends the State's already tough stance on the employee/independent contractor issue. 

Second, will you really be earning money or can your parents be making gifts to you?  Each parent can make a gift to you of $13,000 in 2009 with no reporting required by either you or them.  Yet a third consideration, should you decide to be a bit aggressive, is an old 1993 Private Letter Ruling (PLR 9401013) dealing with a similar situation.  Although a PLR cannot be used as precedent since it only applies to the taxpayer requesting it, in the ruling the IRS decided the parents performed their services, "not motivated by profit, but rather by parental compassion or the sense of responsibility that exists, both morally and legally, between parents and their offspring. For this reason, we conclude that no trade or business exists and the court awarded remuneration received by the Taxpayers is not subject to SECA."

As you tell from just the length of this response, (which only touches on the issue), there is no easy answer.  After reviewing the reporting on Schedule H, you may decide that being an employee is the easiest, if gifting is not an option.  Also, depending on the nature of the care, the amount paid to you, (either as an employee or independent contractor) may, or may not, be deductible as a medical expense. That is an entirely different question.

This answer has been provided by Carol I. Katz, MS, CPA, the Deputy Tax Director at Leonard J. Miller & Associates, Chartered, in Baltimore, Maryland. Carol Katz works exclusively in the tax and financial planning areas, has been published in professional journals and has discussed tax issues on television and public radio. She can be reached at

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