Medicaid Waiver Payments Notice 2014-7

Question

I was issued a 1099 for these (tax free) payments. Freetaxusa seems to only allow you to enter w2’s (which makes no sense). Please help ASAP.

MatthewD · Answer

Hello Shubbywax,

While excludable from federal income tax, these payments, Medicaid waiver payments qualifying under IRS Notice 2014-7 (where caregiver and recipient live together), may still be considered taxable wages for Social Security and Medicare purposes if you are deemed an employee, even if reported on a 1099-NEC instead of a W-2.

Yes, I recommend that you amend your return to correct your return to report the 1099 correctly.  See this thread where I answered your issue on how to report the income as non-taxable on a Schedule C:

https://community.freetaxusa.com/discussion/536/the-i-need-file-tax

Shubbywax · Answer

Thank you. They’re Medicaid waiver payments, not Medicare. And this will cancel the self employment tax as well? I tried this but it seemed to be charging me self employment tax.

I was issued a 1099 NEC.

They are indeed the type addressed in 2014-7.

I already submitted without it as another thread advised.  It has been accepted. Do I need to file an amendment?

GeorgeM · Answer

Hello Shubbywax:

To enter your Form 1099 in our software, click on the Income tab.  In the drop down window, under the category Business/Rental Income, click on 1099-NEC / 1099-MISC.  On the next screen, click the tab “Add a 1099 for ___” and then you will see a screen where you can select either a Form 1099-NEC or a Form 1099-MISC.  I assume in your situation, you received a Form 1099-MISC.

You should also see options to enter your Form 1099-MISC manually or to upload it.  If you have just one Form 1099-MISC to enter, you might just select the option to enter it manually.

Assuming your Medicare waiver payments are, in fact, tax free, then after entering your Form 1099-MISC as described above, you will also need to enter the amount that appears in box 3, on the Form 1099-MISC, as a negative number so that the two amounts offset (subtract) and no tax will be assessed.

This is how to enter the subtraction amount: After entering your Form 1099-MISC as indicated above, then click in the Income tab again, and in the drop down, under the category Uncommon Income, select Other Income.   On the screen “Did you have any of this other income,?” scroll down to the part that says "Medicaid Waiver Payments to Care Provider."  Answer "Yes" and enter the nontaxable payment from the 1099-MISC. (this section will mention box 1 of a form W-2, however, this method will still work for amounts entered for a 1099-MISC.)  After entering your information, click Save and Continue.

Medicaid waiver payments are generally not taxable (excludable from gross income) under IRS Notice 2014-7 provided that you and the care recipient live in the same home.