Medicaid Waiver Caregiver Taxes 2026: The Schedule C Income That Comes Back Out in Part V

§1One job, one tax year, one amount that enters whole and leaves labeled

This article is for you if you run your own home care business — a sole proprietor, paid as an independent contractor on a Form 1099-MISC or 1099-NEC by an agency or fiscal intermediary — and one of the people you care for is an eligible individual who lives in your home under a Medicaid waiver plan of care. That is the reader, stated plainly, because two other readers stand nearby and are not her. The agency employee paid on a W-2 is the majority of waiver caregivers, and her route is named once, in Step 7, so she can recognize herself and stop. The family caregiver with no care business at all meets her own fork in Step 4 — and it never touches Schedule C. This article's spine is the first reader: the one whose panic is mechanical. The full amount of her waiver pay is printed on a 1099. Part of it is excludable from her income. Her questions are two, and both are about lines: where does the tax-free part come back out — and does she owe self-employment tax on it?

The IRS prints an answer to both, in its own questions and answers on Notice 2014-7, and the mechanism is one no other job on this site has: the income goes on Schedule C at line 1, in full — and the excludable part comes back out in Part V, Other Expenses, with "Notice 2014-7" written next to it. It leaves before line 31, so it never reaches Schedule SE. Article 20's notary met income that skips Schedule SE entirely; this is the second eraser the forms print, and it works from inside the Schedule C itself.

§2Step 1: the form that arrived

A 1099 for this pay is common — even when some or all of the pay on it is excludable. The Q&A page prints the payer-side rule that explains why the form keeps arriving: an agency that knows payments to a care provider are excludable under Notice 2014-7 should not file a Form 1099-NEC reporting those payments. The form in the reader's hand exists, most often, because the agency did not know, or did not have the provider's signed statement the Q&As describe. What the 1099's arrival does not do is settle the tax question. The document reports what was paid; the exclusion is tested against the notice's conditions, and the reporting routes below are what the Q&A page prints for a filer holding exactly this form.

§3Step 2: the exclusion test, as the notice prints it

Notice 2014-7 treats qualified Medicaid waiver payments as difficulty of care payments, excludable from gross income under §131. The notice prints the conditions, and all of them are the test:

• The payments are made by a state, a political subdivision of a state, or an entity that is a certified Medicaid provider, under a Medicaid waiver program — the notice addresses only §1915(c) Home and Community-Based Services waiver programs.
• They are paid to an individual care provider for nonmedical support services provided under a plan of care.
• The eligible individual — related or unrelated; the notice states the treatment applies either way — is living in the individual care provider's home.
• The §131 caps travel with the treatment: no exclusion for payments for the care of more than 10 eligible individuals under age 19, or more than 5 aged 19 or over.

The boundaries are printed as plainly as the test. Payments for care provided outside the provider's home "are not qualified Medicaid waiver payments and are not excludable under § 131" — care in the recipient's home is the named case, and respite care for a recipient who does not live with the provider stands on the same side of the line. Vacation pay is not a payment for care and is not excludable. Amounts a recipient pays the provider directly, out of private funds, are not excludable; a program administrator's payment is, even where the recipient cost-shares part of it to the administrator. And payments under a state program that is not a §1915(c) waiver program are outside the notice altogether — the Q&A page's first answer says only that treatment there depends on the nature of the payments and the purpose and design of the program. This article walks none of those; they are the fence, named so the test is not read wider than it is printed.

§4Step 3: the fork — is providing these services your trade or business?

Two Q&A answers stand on either side of one question, and the question is the IRS's own framing: do you have a separate trade or business of providing these services? The sole proprietor in a business of providing home care services takes one route (Step 5). The provider with no such business takes the other (Step 4). The routes share the exclusion and the self-employment answer; they share nothing else — not a form, not a line.

Behind the fork stands a classification question this article does not decide: whether a provider is an employee of the agency, an employee of the care recipient, or an independent contractor. The Q&A page frames that question itself, in its twelfth answer, and names the printed routes to an answer — Tax Topic 762, on employee-versus-contractor status, and Form SS-8, the IRS's own determination of worker status. They are named here the way the Q&A names them. This article takes the posture as the payor issued it — a 1099 in hand, no W-2 — and reads the return that posture files.

§5Step 4: the no-business route — Schedule C is not in it

For the family caregiver the agency does not treat as an employee and who has no separate trade or business of providing these services, the Q&A page prints a two-line route, and neither line is on Schedule C. She enters the payments on Form 1040, line 1d — the line captioned for Medicaid waiver payments not reported on a Form W-2 — and enters the nontaxable amount on Schedule 1, line 8s, the line captioned for exactly that amount, entered in the preprinted parentheses as a negative number. The same answer closes the employment-tax question in the same words the spine route uses: because the payments are nontaxable and excludable, and because she has no trade or business of providing these services, the payments are not self-employment income subject to self-employment tax.

That is the whole of this fork, and it is printed here so this reader leaves by the right door: she does not file a Schedule C for this income — not to report it, and not "to be safe." The form her income belongs on is the one the Q&A names.

§6Step 5: the Schedule C route — line 1 in full, Part V out

The sole proprietor's route is the article's core, and it is three printed moves:

• In, whole. The full amount of the payments reported on the Form 1099-MISC or 1099-NEC is included as income on line 1 of Schedule C — gross receipts, unreduced. The excludable part is not netted against line 1, and it is not held off the form.
• Out, labeled. The nontaxable, excludable amount is then reported as an expense in Part V, Other Expenses, with "Notice 2014-7" written next to that amount. Part V totals at line 48 and carries to line 27b, inside Part II's expense build — so the removal lands in the form's own arithmetic, before line 31, net profit.
• Never on Schedule SE. The Q&A answer prints the consequence in its own sentence: even though she is a sole proprietor, because the amounts are nontaxable and excludable from income, the payments are not self-employment income and are not subject to self-employment tax. Because the amount leaves before line 31, it never enters the figure Schedule SE reads at its line 2. There is no Schedule SE line, box, or code for it — the eraser is upstream of the whole form.

The attribution matters, and this article keeps it visible: the exclusion and its conditions are Notice 2014-7; every reporting line in this step — line 1, Part V, the label, the self-employment sentence — is printed in the Q&A page, not in the notice. The notice itself states, in its own text, that it does not address whether the payments it excludes may be subject to tax under FICA or FUTA — and it prints no self-employment-tax sentence at all. Where this article says the excluded amount is not subject to self-employment tax, the sentence is the Q&A's, cited to the Q&A.

§7Step 6: the mixed year — one Schedule C, both treatments

Most sole proprietors who meet Step 5 also have ordinary clients, and the form holds both years in one. The taxable receipts enter line 1 beside the waiver amount; the ordinary expenses stand on their ordinary Part II lines; the waiver slice alone leaves in Part V. What reaches line 31 is the taxable business's profit, and that — all of it — flows to Schedule SE the way every other article on this site teaches. The other side of that boundary is also IRS-printed: the Service's page on family caregivers and self-employment tax works the case of a sole proprietor running an adult day-care business, paid by a state agency on a Form 1099-NEC, and holds that she owes self-employment tax and reports on Schedule C and Schedule SE — because that pay is not the excluded kind. One waiver client shelters nothing beyond her own payments; the line the Q&As draw runs payment by payment, not business by business. The worked example below runs one such mixed year end to end.

§8Step 7: the W-2 reader's exit

If the waiver pay arrived on a Form W-2, this article is not your route — but the Q&A page prints yours, in its eleventh answer, and it is short enough to state whole. Amounts excludable under the notice are reported in box 12 with Code II — the W-2 instructions define the code as "Medicaid waiver payments excluded from gross income under Notice 2014-7" — and an excludable amount is not included in box 1 at all; if the whole year's pay is excludable, box 1 is left blank. The filer's route: the box 1 amount, if any, on Form 1040, line 1a; the box 12 Code II amount on line 1d; and the total nontaxable amount on Schedule 1, line 8s, entered in the preprinted parentheses as a negative. If box 1 is blank or zero and she is not electing to count the nontaxable payments as earned income for a credit, the answer prints that nothing needs to be reported at all.

One employment-tax sentence belongs to this step and to no other: for an agency's employees, the Q&A page's eighteenth answer states that even income-tax-excluded payments generally are wages for Social Security and Medicare tax purposes — FICA — withheld and reported on the W-2. FICA is not self-employment tax, and the two never trade places in this article: "not subject to self-employment tax" is a sentence about the independent routes in Steps 4 and 5, and it is never printed here as "no Social Security tax."

§9Step 8: what this article does not cover

Three doors exist in the Q&A page and are named here as existence, not walked. The election to count excluded payments as earned income for the Earned Income Credit or the additional Child Tax Credit — the Q&As' ninth answer prints that the choice exists, for open years, all-or-nothing. Amended returns for earlier years in which excluded payments were reported as income — the tenth answer prints the Form 1040-X route and its refund clock. And, as everywhere on this site, state taxes are not covered — a state's treatment of the same payments is its own text, not read here.

§10Worked example: one mixed Schedule C

One worked example, with numbers used only in this article. Our provider runs her own home care business as a sole proprietor. One client — an eligible individual under a §1915(c) waiver plan of care — lives in her home, and the agency that pays her as an independent contractor issued a Form 1099-NEC for the year's waiver payments. A second client pays her privately, at ordinary rates, for care in the ordinary course of the business. These are hypothetical figures, not a prediction and not your numbers.

The waiver stream. The year's qualified Medicaid waiver payments were $28,800, and the full $28,800 stands on the 1099-NEC. Every dollar of it is excludable under the notice's test — §1915(c) program, plan of care, the client living in her home.

The ordinary stream. The private client's fees were $10,400. Nothing about them is excludable; they are the business's taxable receipts.

Line 1. The two streams enter together, whole: $28,800 plus $10,400 is $39,200 on line 1. The 1099 amount is not reduced before it lands, and the private fees are not separated out.

Part II, and the eraser. Her ordinary expenses of the business — $2,860 of car and truck expense, $1,240 of supplies, $780 of liability insurance — total $4,880 on their own lines. In Part V stands one entry: $28,800, with "Notice 2014-7" written next to it, carried through line 48 to line 27b. Line 28, total expenses, is $4,880 plus $28,800 — $33,680.

Line 31. Line 29 — and line 31, with no home-use amount in this example — is $39,200 minus $33,680: $5,520. Read it against the streams and the arithmetic shows the mechanic: $5,520 is exactly the private client's $10,400 less the $4,880 of ordinary expenses. The waiver client's $28,800 entered the form and left it; it is in neither the profit nor anything built on the profit.

Schedule SE. Line 31's $5,520 — and only $5,520 — enters Schedule SE at line 2. Multiplied by 92.35 percent: $5,097.72 at line 4a. The 12.4 percent part is $632.12; the 2.9 percent part is $147.83; line 12, the self-employment tax, is $779.95 — figured entirely on the ordinary business. Line 13 halves it, $389.98, to Schedule 1, line 15.

That is the waiver year as the texts print it: a 1099 that reports the whole amount and settles nothing; an exclusion tested against the notice's conditions and no wider; a Schedule C that takes the income in at line 1 and hands the excludable part back out in Part V, labeled, before profit is ever figured — and a Schedule SE that never sees it.

The mirror image — W-2 wages that file Schedule SE anyway: the minister's dual status. Article 26

Schedule C income that skips Schedule SE entirely, with no Schedule C subtraction at all: the notary's two routes. Article 20