Have you been wondering how to handle IHSS income on a tax return?

How to Handle IHSS Income on a Tax Return

In-Home Supportive Services (IHSS) payments can be tax-exempt in certain cases, depending on whether the provider lives with the recipient. Below are different scenarios and how to handle them when filing a tax return.

Here is also some more information about this topic and the instructions from the IRS website: Family caregivers and self-employment tax information

Scenario 1: What do I do if IHSS W-2 Shows $0 in Wages?

If the IHSS W-2 reports $0 in Box 1 (wages), this generally means the income is excluded under IRS Notice 2014-7 because:

• The provider lives with the recipient of services.
• The income qualifies as non-taxable “difficulty of care” payments.

How to Handle It:

Since the W-2 shows no taxable wages, the taxpayer has two options:

1. Do Not Report the IHSS Income (Recommended)
   • Because the W-2 shows $0 in Box 1, the IRS will reject a tax return that includes a W-2 with no taxable wages (unless it is for non-taxable combat pay).
   • Therefore, do not include the W-2 on the return at all.
   • This is the simplest approach and ensures the income is not mistakenly taxed.
2. Elect to Include the IHSS Income on Line 1d of Form 1040 (Optional)
   • Some taxpayers choose to report IHSS income voluntarily on Line 1d (“Other Earned Income”) to qualify for certain tax credits (e.g., Earned Income Tax Credit).
   • This is not required but may be beneficial if they are eligible for refundable tax credits.

Scenario 2: What if the IHSS W-2 Shows a Taxable Amount in Box 1, but the Income Qualifies as Non-Taxable?

Sometimes, the W-2 incorrectly reports taxable wages in Box 1, even though the provider lives with the recipient and the income should be tax-exempt. In this case, the taxpayer can exclude the income on their tax return.

Steps to Exclude the Income

1. Report the W-2 income on Form 1040, Line 1a as wages (since it appears in Box 1 of the W-2).
2. Offset the income on Schedule 1, Line 8s (“Other Income – Notice 2014-7”) by entering the same amount as a negative adjustment.
3. This effectively cancels out the taxable income, ensuring it is not subject to federal taxes.

Example:

If the W-2 shows $20,000 in Box 1 but the taxpayer qualifies for the live-in exemption, they would:

• Enter $20,000 on Line 1a of Form 1040.
• Enter ($20,000) on Schedule 1, Line 8s to exclude it.

As a result, the taxable wages on the return remain correct.

Key Takeaways

• If the W-2 correctly shows $0 in Box 1, do not include the W-2 on the tax return, as the IRS will reject a return with a W-2 that has no taxable wages.
• If the W-2 incorrectly reports taxable wages, the taxpayer can exclude them using Schedule 1, Line 8s to avoid paying unnecessary taxes.
• Electing to include IHSS income voluntarily (when exempt) may help qualify for tax credits but is not required.

Disclaimer: All tax information should be independently researched and verified by you and your tax professional. Context, circumstances, and tax law application change and may be different.  All information should be verified for critical information independently.