Must Kansas income tax be withheld on Medicaid waiver payments to a home care provider?

Plain-English summary

Kansas Notice 15-16 (December 23, 2015) addresses whether Kansas income tax withholding is required on certain Medicaid waiver payments.

The federal treatment. Under IRS Notice 2014-7, payments to individual care providers for caring for eligible individuals in the provider's home under a Section 1915(c) Medicaid Home and Community-Based Services waiver are treated as difficulty-of-care payments excludable from gross income under Section 131 of the Internal Revenue Code. Certain of these payments are not subject to federal income tax withholding.

The Kansas rule. K.S.A. 79-3296 requires Kansas withholding on wages only when those wages are subject to federal income tax withholding. So Medicaid waiver payments that are not subject to federal withholding are also not subject to Kansas withholding.

Who still registers. An agency with multiple employees typically still registers and withholds, because it also pays wages that are subject to federal and Kansas withholding. But when the individual care recipient is the employer and pays only these exempt wages, that person need not register for Kansas withholding.

What this means for you

Home care agencies

• You generally still register and withhold, because you likely also pay wages that are subject to withholding; only the exempt Medicaid waiver payments escape Kansas withholding.

Individual care recipients acting as employer

• If the only wages you pay are exempt Medicaid waiver payments, you need not register for or withhold Kansas income tax.

Common questions

Are Medicaid waiver payments subject to Kansas withholding? No -- if they are not subject to federal income tax withholding, they are not subject to Kansas withholding.

Why? Kansas (K.S.A. 79-3296) only requires withholding on wages that are subject to federal withholding.

Does an agency still register? Usually yes, because it also pays other, taxable wages.

Does an individual care recipient/employer register? Not if the only wages paid are exempt Medicaid waiver payments.

Citations and references

• K.S.A. 79-3296 -- requires Kansas withholding only where wages are subject to federal income tax withholding.
• Applies IRS Notice 2014-7, treating qualifying Section 1915(c) Medicaid waiver payments as difficulty-of-care payments excludable under IRC Section 131 and, for certain payments, not subject to federal (and therefore Kansas) withholding.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 15-16

Original ruling text

Policy & Research Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Nick Jordan, Secretary Department of Revenue Sam Brownback, Governor
Richard Cram, Director

                                     NOTICE 15-16

             NO WITHHOLDING ON CERTAIN MEDICAID WAIVER PAYMENTS
                                   (DECEMBER 23, 2015)

Advice has been requested regarding whether Kansas withholding is required on certain

Medicaid waiver payments. This Notice addresses that topic.

 On February 23, 2015, the IRS issued a Question and Answer document under the caption

"Certain Medicaid Waiver Payments May Be Excludable From Income". In that document the
IRS stated:

 On January 3, 2014, the Internal Revenue Service (Service) issued Notice 2014-7,
 2014-4 I.R.B. 445. Notice 2014-7 provides guidance on the federal income tax
 treatment of certain payments to individual care providers for the care of eligible
 individuals under a state Medicaid Home and Community-Based Services waiver
 program described in section 1915(c) of the Social Security Act (Medicaid Waiver
 payments). Section 1915(c) enables individuals who otherwise would require care in
 a hospital, nursing facility, or intermediate care facility to receive care in the
 individual care provider's home. The notice provides that the Service will treat these
 Medicaid waiver payments as difficulty of care payments excludable from gross
 income under § 131 of the Internal Revenue Code.

  The Notice (https://www.irs.gov/irb/2014-4_IRB/ar06.html) and Questions and Answers

(https://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-
From-Income) prepared by the IRS address a variety of situations concerning payments for care
of an individual, including whether the care provider is an employee of an agency, an employee
of the individual care recipient, or an independent contractor. They also address the question of
when a payment is exempt from federal income tax as a Medicaid waiver payment, and when a
payment is subject to federal income tax withholding. Understanding how payments are treated
for federal income tax purposes is essential in deciding whether the payments are subject to
Kansas income tax withholding.

 If a care provider is an employee of an agency or of the individual care recipient a payment

made to such person is considered to be wages. Kansas law provides that withholding on wages
is required only when those wages are subject to federal income tax withholding. The
controlling statute, K.S.A. 79-3296, provides, in pertinent part:

       (a) Every employer who is required under federal law to withhold upon wages
 pursuant to the federal internal revenue code shall, whenever the wage recipient is a
 resident of Kansas or the wages shall be paid on account of personal service
 performed in Kansas, withhold and deduct from such wages an amount to be
 determined in accordance with 79-32,100d.

  Under the terms of IRS Notice 2014-7, and the Questions and Answers which explain it,

certain Medicaid Waiver payments are not subject to federal income tax withholding. As a
result, in accordance with Kansas law, these payments are not subject to Kansas income tax
withholding.

 As a general rule, an employer with multiple employees, such as an agency, will register

with the Department of Revenue so it can report and remit withholding tax. This is because
employers with multiple employees typically pay at least some wages that are subject to federal
and state income tax withholding. In other words, while Medicaid Waiver payments made by
the employer may be exempt from Kansas income tax withholding other payments made to the
same employee, or other employees, may be subject to Kansas withholding.

  On the other hand, when an individual care recipient is considered an employer for

purposes of Medicaid Waiver payments there is no need for such person to register with the
Department. This is because the only wages the individual care recipient / employer pays to the
employee(s) are not subject to federal or Kansas withholding tax. Since there is no requirement
to withhold federal or Kansas income tax in this situation there is no need for the individual care
recipient to register for Kansas income tax withholding.

                                TAXPAYER ASSISTANCE

Additional copies of this notice, forms or publications are available from our web site,
www.ksrevenue.org. If you have questions about this Notice, please contact:

                              Taxpayer Assistance Center
                             Kansas Department of Revenue
                             915 SW Harrison St., 1st Floor
                               Topeka, KS 66612-1588
                                 Phone: 785-368-8222
                                  Fax: 785-291-3614