At some point, it’s very likely that caring for your elderly parent is going to cost money. It may be your money, it may be your parent’s money, but there will be dollars spent. For the dollars that go to caregivers, your first instinct might be to just pay them in cash. It’s simple for you, and commonly the preference of the caregiver. None of that confusing and costly IRS stuff for either of you. 

But it may actually be cost-effective and less risky to pay your help in a tax-compliant way. You need to consult with a qualified tax professional, but here’s an overview to get you thinking: 

Legitimate payroll compensation to a healthcare provider, for medical needs, is tax deductible (after a small exclusion). Even though it costs you more to pay the associated employer taxes, you may come out ahead financially, and enjoy protections such as workman’s compensation. 

Here’s an extremely simple example, using your parent’s money: Let’s say that parent’s Adjusted Gross Income is $100,000, and you’re paying a caregiver $1000 a week ($52,000 for the year). The first 7.5% of their AGI is excluded, but the remaining $48,100 you paid is deductible from their taxes. If your parent is in a 25% bracket, that’s a savings of just about $12,000 – which may be more than the extra payroll taxes you paid. And, importantly, by going legit, you should have workman’s comp protection in case that caregiver gets injured on the job. 

To reiterate, talk to your own tax advisor and insurance company. The example above assumed all the care the parent received was considered medical – your deduction would be reduced if only part of the care qualified (for instance it also included housekeeping or companionship). And different states have different tax rates, as well as different insurance regulations. So you must consult a professional.

Another huge issue is the complications of handling a payroll. Most of us don’t know how to do it, and few would have the time or interest to learn. Hiring a payroll company is an obvious solution, but just as obviously it’s going to be another expense. 

However, there are many firms that can help “civilians” pay for their care. I’ve been using GTM, and could not be happier with their services. If you’ll let us pass along your information to GTM, you’ll receive a $50 discount on their services.

Another fine company, care.com, will not only handle your payroll, it’ll also help you find the right caregiver in the first place. 

The care.com site asks a series of questions about your parent’s needs, then presents several background-checked candidates for your perusal. You’ll also begin to receive emails from caregivers who’ve seen your information and want to apply. You’ll need a paid membership ($39 for a month, $25/mo quarterly, or $13/mo annually) to reply to those potential caregivers. 

And once you’ve found someone, care.com’s partner HomePay will handle getting them paid. Just like GTM does, they will onboard your employee; prepare, file and remit all the taxes; and pay your caregiver through direct deposit. That costs $59 per month. There’s also a premium plan, at $75/mo, which adds obtaining federal and state tax ID’s, full-service phone support, dealing with the tax agencies on your behalf, and free premium membership at care.com, wiping out their monthly charges mentioned above. 

In summation, GTM will do a fantastic job if you have a caregiver and want to pay him or her legitimately. And care.com offers an excellent one-stop solution for finding, hiring, and then paying a caregiver.