A Medicaid waiver payment is money that a state pays to a caregiver for providing home and community-based services to someone who would otherwise need care in a nursing home, hospital, or other institution. These payments exist because of federal “waivers” that let states bypass the normal Medicaid rule requiring institutional care, instead funding services delivered in a person’s home. For caregivers, the most important thing to know is that many of these payments are tax-free under IRS rules, though how you report them depends on your specific situation.
How Medicaid Waivers Work
Standard Medicaid covers nursing home stays and other institutional care. But most people prefer to stay home if they can. Medicaid waivers give states the flexibility to redirect that institutional funding toward home and community-based services (HCBS) instead. Each state designs its own waiver programs within broad federal guidelines, which is why the specifics vary significantly depending on where you live.
The most common type is the Section 1915(c) waiver, which authorizes states to provide HCBS as a direct alternative to nursing homes and intermediate care facilities. States can also use broader Section 1115 waivers to experiment with new approaches to delivering and paying for long-term care. Regardless of which waiver authority a state uses, the core idea is the same: pay for services that keep a person in their community rather than in an institution.
What Services These Payments Cover
Medicaid waiver payments fund nonmedical support services that help a person live independently. The standard menu includes:
- Personal care: help with bathing, dressing, eating, and other daily activities
- Homemaker services: meal preparation, cleaning, laundry
- Home health aide services: hands-on care under a health plan
- Adult day programs: structured daytime supervision and activities
- Respite care: temporary relief for primary caregivers
- Habilitation: help learning or maintaining skills for daily living
- Case management: coordinating services and supports
States can also propose additional service types beyond this list, as long as they help divert or transition someone from an institutional setting into their home and community.
How Much Caregivers Get Paid
Payment rates vary dramatically by state and by provider type. A 2025 KFF survey of state Medicaid programs found that the median hourly rate paid directly to personal care providers is about $19, while home health aides receive a median of roughly $41 per hour and registered nurses about $70. When payments go through agencies rather than directly to individual providers, the numbers shift: personal care agencies receive a median of about $26 per hour, and home health agencies about $51.
The range across states is enormous. Personal care provider rates run from $12 per hour at the low end to $36 at the high end. Home health agency rates span from $25 to $159. Your state’s Medicaid office or waiver program administrator can tell you the exact rate for your situation.
Family Members as Paid Caregivers
Many states allow family members to receive Medicaid waiver payments for caring for a loved one. Some states run self-directed programs that give the person receiving care (or their representative) control over hiring, training, and supervising their own caregivers, including relatives. New York’s Consumer Directed Personal Assistance Program is one well-known example: the Medicaid recipient chooses and hires their own personal assistant, while a fiscal intermediary handles payroll, tax withholdings, and employment records.
In these arrangements, the family caregiver is technically an employee. They receive wages, and someone processes their payroll. This is where the tax question becomes important.
Why These Payments Can Be Tax-Free
Under IRS Notice 2014-7, Medicaid waiver payments made to a caregiver who lives in the same home as the person receiving care are excludable from gross income. The IRS treats these as “difficulty of care” payments, a category originally created for foster care providers. The key requirements are straightforward: the payments must come through a Medicaid waiver program, they must be for nonmedical support services, and the care recipient must live in the caregiver’s home.
If you provide care to someone who does not live with you, the payments do not qualify for this exclusion and are taxable. There are also caps on how many people you can claim the exclusion for: no more than 10 individuals under age 19, or five individuals age 19 and older.
How to Report Waiver Payments on Your Taxes
Even though qualified Medicaid waiver payments are not taxable, you may still need to handle them on your tax return depending on how they were reported to you. The process differs based on the tax form you received.
If You Received a W-2
Your nontaxable waiver payments may appear in Box 12 of your W-2 with Code II, rather than in Box 1. If Box 1 is blank or shows zero and you are not choosing to count these payments as earned income for tax credit purposes, you do not need to report the W-2 on your return at all. If amounts do appear in Box 1, report that amount on Form 1040 line 1a and the Box 12 Code II amount on line 1d. Then enter the total nontaxable amount as a negative number on Schedule 1, line 8s, which effectively zeroes it out.
If You Received a 1099-MISC or 1099-NEC
Enter the waiver payment amount on Form 1040 line 1d, then subtract the nontaxable portion on Schedule 1, line 8s. If you are a sole proprietor who reports income on Schedule C, include the full payment amount as income on Schedule C line 1, then deduct the nontaxable amount in Part V (Other Expenses) with the note “Notice 2014-7” written next to it.
Choosing to Count Payments as Earned Income
Here is an important option many caregivers miss: even though the payments are excluded from taxable income, you can still choose to treat them as earned income for the purpose of claiming tax credits like the Earned Income Tax Credit or the Child Tax Credit. This can be a significant benefit for lower-income caregivers, since it lets you qualify for refundable credits without actually owing tax on the waiver payments themselves.
Amending Past Tax Returns
If you paid taxes on Medicaid waiver payments in earlier years and did not know about the exclusion, you can file an amended return to get a refund. Use Form 1040-X and explain in Part III that the payments are excludable under Notice 2014-7. The IRS rule has been in effect for payments received on or after January 3, 2014, so you can amend any prior year where the statute of limitations for claiming a refund has not yet expired (generally three years from the filing date or two years from the date you paid the tax, whichever is later).