Live-in care payments qualify for the difficulty-of-care income exclusion

Plain-English summary

A state program asked whether Medicaid payments to personal care providers who live with the people receiving care could be excluded from the providers' income. The program operates under section 1905(a)(24) of the Social Security Act, not the Medicaid waiver provision addressed directly by Notice 2014-7. The IRS found that the program's anti-institutionalization purpose, state oversight, and payments for disability-related care were sufficiently similar to foster care programs and difficulty-of-care payments. It therefore approved treatment of the payments as excludable under IRC § 131 when the eligible program member lives in the provider's home, whether or not the two are related. The payments are not wages subject to income tax reporting or withholding under IRC §§ 6041 and 6051, but they must be reported in box 12 of Form W-2 with code II. Social Security, Medicare, and federal unemployment tax rules may still apply unless a household-employment or family-service exception applies.

Ruling snapshot

• Question: Are payments to live-in personal care providers under the state program excludable difficulty-of-care payments, and how must they be reported?
• Outcome: Approved, with separate FICA, FUTA, and Form W-2 reporting rules still potentially applicable
• Key authorities: IRC §§ 61, 131, 3121, 3306, 3402, 6041, 6051; Treas. Reg. §§ 1.6041-1, 1.6041-2; Notice 2014-7

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202536026
 Release Date: 9/5/2025
 Index Number: 131.02-00, 6041.08-00,
               6051.00-00                                       Person To Contact:
                                                                --------------------------, ID No. -----------------
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 ------------------------------------------------------------   Telephone Number:
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 ------------------------------------------------------------   Refer Reply To:
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 ----------------------------                                   PLR-122230-24
 --------------                                                 Date:
                                                                June 4, 2025




Legend:

 Taxpayer                         = -----------------------------------------------------------------------------
                                    --------------------------------
 Department                       = --------------------------------------------------------------------------
 Date                             = ----------------------------
 Program                          = --------------------------------------------------------------------------
 State                            = ------------------------
 State Regulation § q             = --------------------------
 State Regulation § r             = -------------------------------
 State Regulation § s             = ----------------------------
 State Regulation § t             = ----------------------------
 State Statute § e                = ------------------------
 State Statute § f                = --------------------------
 State Statute § f                = ------------------------
 State Statute § h                = ------------------------

Dear ------------------:

This letter refers to Taxpayer’s request for a private letter ruling, dated Date, requesting
a ruling that payments to personal care providers who live in the same home as the
person to whom they provide care (Program members) under the State’s in-home
supportive care program (Program) are difficulty of care payments excludable from the
gross income of the provider under section 131 of the Internal Revenue Code (Code).
Taxpayer requests that if determined to be difficulty of care payments, Taxpayer is not
required under section 6041 or 6051 of the Code to report these payments as wages
subject to income tax. Finally, Taxpayer requests that it may treat payments to
providers as excludable payments described in Notice 2014-7, 2014-4 I.R.B. 445, such
PLR-122230-24                                 2

that Department may look to the Q&A on the Notice available at irs.gov for information
on reporting and withholding obligations.

This letter ruling is being issued electronically in accordance with Rev. Proc. 2024-1,
2024-1 I.R.B. 1. A paper copy will not be mailed to Taxpayer.

                                          FACTS

The Program is operated pursuant to section 1905(a)(24) of the Social Security Act
(SSA) and was established under State Statute § e.

Taxpayer is the oversight council for the Program, and is within the Department, but not
subject to the control of the Department. Department is the state agency for the
Medicaid program in State. Taxpayer ensures the quality of long-term, in-home,
personal care by recruiting prospective care providers, providing training opportunities
for care providers, and providing assistance to Program members. See State Statute
§§ e and f. Taxpayer also conducts routine performance reviews of Program and
produces reports for the State legislature, governor, and the public that provide an
explanation of the full costs of the personal care services. See State Statute § g.

The Program is designed to help prevent the institutionalization of individuals with
permanent or chronic disabilities and to enable such individuals to continue to live in
their communities of choice. The Program’s care providers provide services that consist
of physical assistance with activities of daily living and instrumental activities of daily
living, which are provided in a community-based setting. See State Regulation § q.
Activities of daily living include activities such as bathing or grooming, dressing, eating,
and mobility. See State Regulation § r. Instrumental activities of daily living include
activities such as household services, meal preparation, and transportation. See State
Regulation § t. The Program is a self-directed program, through which the Program
member is the employer of the care provider and hires, schedule, trains, directs,
supervises, and may terminate the care provider. See State Statute § h.

Under the Program, a Program member receiving care must be determined by State to
be clinically and financially eligible for coverage of personal care services. Clinical
eligibility for personal care services determines the amount of authorized services and is
based on an in-person assessment performed by a personal care management services
agency, which is an agent of State. See State Regulation § s.

For persons determined eligible for personal care attendant services, the Department
facilitates payment to a care provider via a contract with a fiscal intermediary that
performs payroll and required tax withholdings for care providers on behalf of Program
members.
PLR-122230-24                                  3

                                             LAW

Section 61(a) of the Code provides that, except as otherwise provided, gross income
means income from whatever source derived, including compensation for services.

Section 131(a) excludes qualified foster care payments from the gross income of a
foster care provider.

Section 131(b) defines a qualified foster care payment, in part, as any payment under a
foster care program of a state or a political subdivision of a state that is either (1) paid to
the foster care provider for caring for a qualified foster individual in the foster care
provider’s home, or (2) a difficulty of care payment.

Section 131(b)(2) defines a qualified foster individual as any individual who is living in a
foster family home in which the individual was placed by an agency of a state or a
political subdivision by a state or by a qualified foster care placement agency.

Section 131(b)(3) defines a qualified foster care placement agency, in part, as a
placement agency that is licensed or certified for the foster care program of a state or a
political subdivision of a state.

Section 131(c) defines difficulty of care payments as compensation to a foster care
provider for the additional care required because the qualified foster individual has a
physical, mental, or emotional handicap. The provider must provide the care in the
provider's foster family home, a state must determine the need for this compensation,
and the payor must designate the compensation for this purpose. In the case of any
foster home, difficulty of care payments are not excludable to the extent that the
payments are for more than 10 qualified foster individuals who have not attained age 19
or 5 qualified foster individuals who have attained age 19. See section 131(c)(2).

Notice 2014-7 provides that the Internal Revenue Service (Service) will treat qualified
Medicaid waiver payments as difficulty of care payments under section 131(c) that are
excludable from the gross income of the individual care provider. The Notice defines
qualified Medicaid waiver payments as payments by a state, a political subdivision of a
state, or an entity that is a certified Medicaid provider, under a Medicaid waiver program
to an individual care provider for nonmedical support services provided under a plan of
care to an eligible individual (whether related or unrelated) living in the individual care
provider's home. The Notice addresses only payments under a state Medicaid Home
and Community-Based Services waiver program under section 1915(c) of the SSA.

Q&A1 at www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-
Excludable-From-Income, provides that whether the Service will treat payments
received by an individual care provider under a state program other than a section
1915(c) program as difficulty of care payments excludable from the gross income of the
PLR-122230-24                                4

provider under section 131 will depend on the nature of the payments and the purpose
and design of the program.

Section 3402(a) of the Code, relating to income tax withholding, generally requires
every employer making a payment of wages to deduct and withhold upon those wages
a tax determined in accordance with prescribed tables or computational procedures.

Section 6041(a) provides, in part, that all persons engaged in a trade or business and
making payments in the course of the trade or business to another person of wages or
other fixed or determinable gains, profits, and income of $600 or more in any taxable
year must render a return of information in the form and manner prescribed by
regulations.

Section 1.6041-1(b) of the Income Tax Regulations (regulations) clarifies that the term
“all persons engaged in a trade or business” includes states and their subdivisions.

Section 1.6041-1(c) of the regulations provides that income is fixed when it is to be paid
in amounts definitely predetermined and that it is determinable whenever there is a
basis of calculation by which the amount to be paid may be ascertained.

Section 1.6041-2(a) of the regulations provides that wages, as defined in section 3401,
paid to an employee must be reported on Form W-2, “Wage and Tax Statement.”

Section 6051(a) provides that employers must furnish the tax return copy and the
employee's copy of Form W-2 to employees for remuneration paid during the calendar
year. The Form W-2 must show, among other information, the total amount of wages
paid subject to withholding of income tax, the total amount of wages paid subject to
social security and Medicare taxes, and the total amounts of income tax and social
security and Medicare taxes deducted and withheld. Section 6051(d) and section
31.6051-2(a) of the Employment Tax Regulations provide that employers must file a
copy of the Form W-2 with the Social Security Administration.

                                       ANALYSIS

   A. Payments under State’s In-Home Supportive Care Program Will Be Treated as
      Excludible Difficulty of Care Payments

The underlying rationale in Notice 2014-7 for treating certain Medicaid waiver payments,
pursuant to section 1915(c) of the SSA, as difficulty of care payments excludable from
gross income of the provider under section 131 is the similarity in the purpose and
design of the Medicaid waiver programs and foster care programs. The Notice
provides:

   Section 131 does not explicitly address whether payments under Medicaid
   waiver programs are qualified foster care payments. Medicaid waiver programs
PLR-122230-24                                5

   and state foster care programs, however, share similar oversight and purposes.
   The purpose of Medicaid waiver programs and the legislative history of section
   131 reflect the fact that home care programs prevent the institutionalization of
   individuals with physical, mental, or emotional handicaps. See 128 Cong. Rec.
   26905 (1982) (stating that “[difficulty of care payments] are not income to the
   [foster] parents, regardless of whether they, dollar for dollar only cover expenses.
   [These] parents are saving the taxpayers' money by preventing
   institutionalization of these children.”); S. Rep. No. 97-139 at 481 (1981)
   (describing the purpose of the amendment to 42 USC § 1396n, allowing
   Medicaid waivers for home and community-based services, as “[permitting] the
   Secretary to waive the current definition of covered [M]edicaid services to include
   certain nonmedical support services, other than room and board, which are
   provided pursuant to a plan of care to an individual otherwise at risk of being
   institutionalized and who would, in the absence of such services be
   institutionalized”). Both programs require state approval and oversight of the
   care of the individual in the provider's home. The programs share the objective
   of enabling individuals who otherwise would be institutionalized to live in a family
   home setting rather than in an institution, and both difficulty of care payments
   and Medicaid waiver payments compensate for the additional care required.

Whether payments under Program will be treated as difficulty of care payments
excludable from the gross income of the provider under section 131 depends on an
analysis of the purpose and design of the program and the nature of the payments.

    1. Purpose of State’s In-Home Supportive Care Program

The purpose of Program is to prevent the institutionalization of individuals with
permanent or chronic disabilities and to enable such individuals to continue to live in
their communities of choice, including in their own homes.

An individual must be determined by State to be clinically and financially eligible for
coverage of personal care services. Clinical eligibility for personal care services
determines the amount of authorized personal care services and is based on an in-
person assessment performed by a personal care management services agency, which
is an agent of State.

Thus, the purpose of State’s in-home supportive care program is similar to the purpose
of foster care programs as stated in Notice 2014-7. That is, both State’s in-home
supportive care program and foster care programs prevent institutionalization of
individuals with physical, mental, or emotional handicaps and enable such individuals to
be cared for in a home setting.

    2. Design of State’s In-Home Supportive Care Program
PLR-122230-24                                 6

The Program is administered under the discretion and oversight of Taxpayer, a division
of State Department. Taxpayer carries out recruiting duties, provides training
opportunities for care providers, and provides assistance to Program members.
Taxpayer also is responsible for reviewing and reporting on the performance and costs
of the program to the state government and the public.

Thus, the design of State’s in-home supportive care program is similar to the design of
foster care programs. That is, both State’s in-home supportive care program and foster
care programs require state approval and oversight of the care in the provider’s home.

    3. Nature of Payments under State’s In-Home Supportive Care Program

Care providers employed by Program members in the State’s in-home supportive care
program receive payments for the performance of care provider services, including
assistance to Program members for activities of daily living and instrumental activities of
daily living.

The nature of the payments to individual care providers under State’s in-home
supportive care program is similar to the nature of difficulty of care payments. Difficulty
of care payments compensate a provider for the additional care required because an
individual has a physical, mental, or emotional handicap. Similarly, an in-home
supportive care provider receives compensation for the additional care required by an
individual who needs assistance with one or more activities of daily living to remain
safely at home and to prevent institutionalization.

Accordingly, the purpose and design of Program are similar to the purpose and design
of foster care programs, and the nature of the described payments to care providers is
similar to the nature of difficulty of care payments under section 131. Therefore,
payments made under State’s in-home supportive care program to an individual care
provider for in-home supportive care provided for a Program member who resides in the
same home as their provider will be treated as difficulty of care payments excludable
from the gross income of the providers under section 131.

   B. Taxpayer’s Reporting and Withholding Obligations in General

In general, payments made to an individual care provider as an employee of the
Program member as employer are wages that would be: (1) includable in the care
provider’s gross income and subject to income tax under section 61(a)(1), (2) reportable
on Form W-2 under sections 6041 and 6051, and (3) subject to income tax withholding
under section 3402. However, payments made to an individual care provider that are
excludable from gross income of the provider under section 131 are not reportable
under section 6041 or 6051 as wages subject to tax and income tax withholding.
Nevertheless, payments made to an individual care provider are wages subject to taxes
under the Federal Insurance Contributions Act (FICA) (also known as social security
PLR-122230-24                               7

and Medicare taxes) and the Federal Unemployment Tax Act (FUTA) unless an
exception applies.

Specifically, if the Program member (and not an outside agency) is the employer of the
individual care provider, the FICA tax rules for domestic service (household work done
in or around the Program member employer’s home) may apply. Under those rules,
payments for services performed for a spouse or a child and services performed for a
parent by a child under the age of 21 generally are not subject to FICA tax under
section 3121(b)(3)(B) of the Code. In addition, if wages for domestic services paid
during a calendar year are below a threshold ($2,800 for 2025), the wages are not
subject to FICA tax under sections 3121(a)(7)(B) and 3121(x). Similarly, payments for
services performed for a spouse or a child and services performed for a parent by a
child under the age of 21 are not subject to FUTA tax under 3306(c)(5) of the Code. In
addition, there is a dollar threshold for wages paid to all household employees for
purposes of FUTA tax under section 3306(a)(3).

Accordingly, for those payments that are excludable from an individual care provider’s
gross income under section 131, Taxpayer is not required under section 6041 or 6051
to report the payments as wages subject to income tax and income tax withholding.
However, Taxpayer is required to report payments that are excludable from an
individual care provider’s gross income in box 12 of Form W-2 with code II. Moreover,
taxpayers may be required under sections 6041 and 6051 to report the payments as
wages to the individual care provider subject to FICA and FUTA taxes, unless one of
the exceptions applies. In addition, Taxpayer may look to the Q&As on Notice 2014-7
(in particular, Q&As 15 - 20), available on irs.gov at
https://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-
From-Income, and Publication 926, Household Employer's Tax Guide, also available on
irs.gov, for further information on its reporting and withholding obligations.

                                     CONCLUSION

For the reasons explained above, the described payments under State’s in-home
supportive care program will be treated as difficulty of care payments excludable from
the gross income of the provider under section 131. Specifically, the following rulings
are granted:

   (1) Medicaid payments made under State Program, pursuant to section 1905(a)(24)
       of SSA, to an individual care provider for in-home supportive care provided for an
       eligible Program member (whether related or unrelated) who resides in the same
       home as the care provider will be treated as difficulty of care payments
       excludable from the gross income of the provider under section 131.

   (2) Taxpayer is not required under section 6041 or 6051 to report these payments as
       wages subject to income tax.
PLR-122230-24                                  8

   (3) Taxpayer may treat payments to providers as excludable payments described in
       Notice 2014-7, such that Department may look to the Q&A on the Notice
       available at irs.gov for information on reporting and withholding obligations.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. All taxpayer identifying
information has been redacted as required under section 6110(c).

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.


                                                   Sincerely,



                                                   Amy Pfalzgraf
                                                   Branch Chief, Branch 5
                                                   Office of Associate Chief Counsel
                                                   (Income Tax & Accounting)

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