Hiring someone to provide care for an elderly or disabled family member can bring important tax and reporting responsibilities that are easy to overlook. Depending on the relationship between the caregiver and the person receiving care, as well as how the caregiver performs their services, the caregiver may be considered an employee or self-employed for federal tax purposes. Understanding the distinction can help both caregivers and families determine what taxes may apply and how compensation should be reported.
Who is considered a caregiver?
A caregiver is someone who performs in-home services for elderly or disabled individuals. Generally, they are considered an employee and the person being cared for is considered the employer. This could make them responsible for employment taxes. However, there are some cases when the employer may not owe employment taxes. Some examples are when the caregiver is:
- Their spouse
- Their child under the age of 21
- Their parent, unless an exception applies
- An employee who is under the age of 18 at any time during the year, unless an exception applies
It’s important to know that even if they don’t owe employment taxes, they are still required to report the caregiver’s compensation on Form W-2.
When is caregiver not considered an employee?
Sometimes, caregivers aren’t considered employees, but they are still required to report the compensation as income on their Form 1040 or 1040-SR. They may also be required to pay self-employment tax depending on the facts and circumstances. Here are some examples of when a family member caregiver typically wouldn’t owe a self-employment tax:
- If a family member caregiver is paid by an insurance company to take care of their spouse. The taxpayer would still be required to report the income though.
- If a family member caregiver received income from a state agency to care for their grandchildren so their daughter could work. Again, the taxpayer would still be required to report any income.
When may self-employment tax apply?
If the caregiver is engaged in a trade or business providing care services, they would be required to pay self-employment tax. For example, if a caregiver received income from a state agency to care for their grandmother, and they operate a sole proprietorship adult day-care business for multiple clients, including their grandmother, in their home, they would owe self-employment tax. This is because the taxpayer is engaged in a trade or business of providing care giving services as a sole proprietor operator of an adult day care. The taxpayer must report the full amount of the payment as income on both Schedule C PDF and Schedule SE PDF.
Final thoughts
Caregiver arrangements can vary widely, and small differences in the relationship, payment arrangement, or services provided can affect how compensation is treated for tax purposes. Before assuming a caregiver is an employee, an independent contractor, or exempt from certain employment taxes, consider the specific circumstances involved. If you have questions about caregiver payments, employment taxes, or reporting requirements, contact the SEK tax team using the form on this page for guidance based on your situation.
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