In-Home Senior Care: Regulatory Changes Driving Private Employment

In-home senior care provider is one of the fastest-growing segments of the care industry. The high cost of facility-based care, coupled with the almost universal desire to age at home, makes in-home care an increasingly popular option for families.

Additionally, recent legislative forces, such as the Department of Labor’s repeal of the Companion Care Exemption for third-party employers (i.e. home care agencies), have driven up agency costs and, therefore, hourly rates for clients. This is especially true for high-hour cases that require continuity of care due to cognitive impairment (i.e. Alzheimer’s disease/Dementia).

While hourly rates for agency-employed caregivers have risen significantly for these high-hour cases, families in most states are able to take advantage of one of the overtime exemptions (the federal exemption for live-in employees or the Companion Care Exemption for first-party employers).

Using one of the overtime exemptions can save tens of thousands of dollars each year.  In the graph below, you can see that, as hours rise, the cost differential between agency-directed care and private employment grows dramatically.

* Costs are determined by national averages and research via Genworth and the US Census Bureau. Private employment figures include caregiver wages ($11.35/hr), payroll taxes, hiring a payroll & tax service, and workers’ compensation insurance. Agency costs include agency rate ($20/hr), overtime, insurances and business overhead. If seeking more affordable options for in-home care leads families to hire their own caregiver(s), here are some of the household employment issues that will likely come into play.

Employee vs. Independent Contractor

There is a common misconception that senior caregivers privately employed in the home can be treated as independent contractors so that payroll taxes can be avoided. However, the IRS has ruled that these workers should be classified as employees because the family has the right to control how, what, when or by whom the work should be performed. It doesn’t matter how many hours they work, how much they are paid or what they are called in a work agreement. Misclassifying a household employee as an independent contractor is considered tax evasion in the eyes of the IRS and can create significant penalties and problems for your clients.

Tax breaks

Families that employ a caregiver – and pay him/her legally – can take advantage of tax breaks that can largely offset their employer payroll taxes. For many, the tax savings can significantly offset their employer costs. The tax breaks available to most families with caregiving needs are:

  • Dependent Care Account (a type of Flexible Spending Account specifically for dependent care needs)
  • Dependent Care Tax Credit (IRS Form 2441)
  • Medical Flexible Spending Account (used only for medical care)
  • Medical Care Tax Deduction (itemized deduction for qualifying medical expenses)

As with most tax breaks and rules, there are a few notes and exceptions:

  • To capitalize on either of the dependent care tax breaks, families must pass the “work-related test,” meaning both spouses must be employed or full-time students and the person receiving care must pass the “qualifying persons” test (generally a dependent).
  • To qualify for either of the medical tax breaks, the care must be prescribed by a licensed healthcare professional. (The care does not have to be performed by a nurse or healthcare professional).
  • The same expenses cannot be applied to more than one tax break.

Other ways to save money

As families budget for their care needs, it’s important to know if certain benefits will kick in to help pay for the cost of hiring a caregiver. Many seniors can qualify for assistance through Long Term Care Insurance plans or Veterans’ Administration (VA) programs.

The VA can provide pension benefits that can allocate funds to be used for home care services for a veteran and/or their spouse. Similarly, if a long-term care insurance policy is in place, benefits can be paid out by the insurance company to help offset the costs associated with private care. If care recipients are eligible for any of these benefits as they can have a major impact on the cost of care.

 Understandably, families may feel overwhelmed by all the household employer obligations. It’s a lot for a busy family to manage – which is why, if left to their own devices, most families will make mistakes and oversights that expose them to audits and wage disputes. Stewardship and guidance – hopefully at the time of hire before mistakes have happened – will likely save families a significant amount of money and frustration.

By Tom Breedlove, Director of HomePay

In-Home Senior Care: Regulatory Changes Driving Private Employment was last modified: March 6th, 2023 by Phil Sanders