If you are a CDPAP caregiver who lives in the same home as the person you care for, your wages from the Consumer Directed Personal Assistance Program are excluded from federal income tax. The CDPAP tax exemption comes from IRS Notice 2014-7, which treats qualifying Medicaid waiver payments as “difficulty of care” payments under Section 131 of the Internal Revenue Code.1Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income Spouses, parents, and children under 21 who care for a family member may also skip Social Security and Medicare taxes on those wages under a separate rule. The savings can run into the thousands per year, but they depend on living arrangements and paperwork that has to stay current.
Who Qualifies for the Income Tax Exclusion
The rule is short. If the caregiver and the consumer share a home, the caregiver’s CDPAP wages are excluded from gross income. It does not matter whether the caregiver is related to the consumer or not.2Internal Revenue Service. Internal Revenue Bulletin 2014-4 The payments must be for nonmedical support services delivered under the consumer’s Medicaid plan of care — help with bathing, dressing, cooking, and similar daily activities.3Internal Revenue Service. Internal Revenue Service Notice 2014-7
The exclusion is not optional. If you meet the criteria, the wages must be excluded. You cannot choose to treat them as taxable simply because it looks easier at filing time.
What “Living Together” Actually Means
Everything turns on where the caregiver actually lives. The IRS looks at your principal residence — where you sleep on a regular basis, where your mail arrives, where your license and utility accounts point. If you keep a separate apartment or house, even part-time, the exclusion falls apart and your CDPAP wages become ordinary taxable income.1Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income
Short trips, vacations, and hospital stays do not automatically break shared-residence status, as long as the home remains your principal residence throughout.4Internal Revenue Service. Publication 523 – Selling Your Home Trouble tends to start when a caregiver gradually moves to a new address without updating anything, leaving a paper trail that no longer matches the tax position on their return.
When Family Caregivers Also Skip FICA
The income tax exclusion is one thing. Social Security and Medicare taxes are a separate question. FICA runs 7.65% of wages (6.2% Social Security plus 1.45% Medicare), and Notice 2014-7 says nothing about it.
Section 3121 of the Internal Revenue Code exempts certain family-based domestic work in a private home from FICA. For CDPAP, that means no FICA on wages when the caregiver is:
- The consumer’s spouse
- The consumer’s child under age 21
- The consumer’s parent, with narrow exceptions when the consumer is a single parent with a young dependent in the home
Siblings, adult children age 21 and over, and unrelated caregivers do not get the FICA exemption. They owe the full 7.65% even when their income tax is zeroed out by Notice 2014-7. Wages still get reported on a W-2 for exempt family workers, even when no FICA is withheld.6Internal Revenue Service. Tax Situations When Taking Care of a Family Member
Wages That Stay Taxable
Not every dollar routed through CDPAP is excluded. The exclusion covers Medicaid waiver payments for in-home care under the consumer’s plan of care. Several kinds of pay fall outside it:
- Vacation pay and bonuses above the standard Medicaid waiver rate
- Care provided outside the shared home, such as time spent accompanying the consumer to appointments
- Care for anyone who does not live in your home, regardless of your relationship to them
Section 131 also caps how many people’s care can qualify: no more than ten individuals under age 19 and no more than five age 19 or older. For a caregiver looking after one family member, the cap does not matter.
Stopping Withholding: W-4 and Fiscal Intermediary Paperwork
Your fiscal intermediary handles CDPAP payroll and is the one who actually stops pulling income tax from your check. They need proof that you meet the shared-residence requirement before they will change anything. Plan to hand over:
- A driver’s license or state ID showing the same address as the consumer
- Residency proof such as utility bills in your name at that address, a lease listing you as a tenant, or a mortgage statement
- An attestation form from the fiscal intermediary, on which you certify when you began living with the consumer and provide your Social Security number and the consumer’s Medicaid ID
You also have to update your Form W-4. If all your income is excluded under Notice 2014-7 and you had no tax liability last year and expect none this year, you can claim “exempt” on the W-4 to stop federal withholding. Here is the timing trap: an exempt W-4 is only valid for the calendar year you file it in. You must file a new exempt W-4 by February 15 each year, or the fiscal intermediary is required to start withholding as if you were single with no adjustments.7Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate Miss the deadline and tax comes out of your checks until you refile; the fiscal intermediary will not refund what has already been withheld.
Reporting Excluded Wages on Your Return
Excluded does not mean invisible. Your fiscal intermediary will still issue a W-2 for the full amount, and skipping it on your return creates a mismatch that draws IRS notices.
Report the full W-2 amount on Form 1040, line 1a (wages and salaries), the same as any other job. Then go to Schedule 1, line 8s, which is labeled specifically for Medicaid waiver payments excluded from income, and enter the excluded amount there. It appears in parentheses, which tells the IRS to subtract it.8Internal Revenue Service. Schedule 1 Form 1040 Additional Income and Adjustments to Income The two entries cancel out. Your wages are documented for things like loan applications, and your tax on them stays at zero.
Amending Past Returns for a Refund
If you paid federal income tax on CDPAP wages in earlier years while living with the consumer, you can amend those returns and claim a refund. Notice 2014-7 took effect January 3, 2014, so any qualifying wages from that date forward were eligible, whether or not you claimed the exclusion at the time.2Internal Revenue Service. Internal Revenue Bulletin 2014-4
The refund window is generally three years from the date you filed the original return or two years from the date you paid the tax, whichever is later. Use Form 1040-X for each year, run the same Schedule 1 adjustment, and attach a short explanation citing Notice 2014-7. For a full-time live-in caregiver who paid tax on those wages for several years, the refund can be significant.
The EITC Still Applies
One quirk works in the caregiver’s favor. Even though the wages are excluded from tax, they still count as earned income for the Earned Income Tax Credit. The IRS specifically lists Medicaid waiver payments excluded on Schedule 1 as earned income for EITC purposes.9Internal Revenue Service. Earned Income and Earned Income Tax Credit (EITC) Tables
That means you can exclude the income from tax and still use it to qualify for a refundable credit worth up to several thousand dollars, depending on filing status and number of qualifying children. For tax year 2025, the AGI limits run from $19,104 for a single filer with no children up to $68,675 for a married couple filing jointly with three or more children.9Internal Revenue Service. Earned Income and Earned Income Tax Credit (EITC) Tables For an eligible caregiver, filing a return can produce a net payment from the IRS even though the CDPAP wages themselves generate no tax.
State Taxes Are a Separate Question
Notice 2014-7 is federal. Whether your state honors it depends on whether the state conforms to that federal treatment. New York generally follows the federal treatment of Medicaid waiver payments for CDPAP wages, but a state that does not conform could tax income the IRS excludes. If you are unsure how your state handles these payments, check with the state tax agency or a tax professional before assuming your state return mirrors your federal one.