Personal Service Contract

The Medicaid Manual addresses service contracts for the completion of tasks such as grocery shopping, housekeeping, financial management and cooking when the individual is no longer able to perform for him/herself. 

The service contract must be in writing and follow the traditional rule of contracts, although M1450.570.B of the Medicaid Manual provides that written statements verifying the terms of the agreement by all parties could be sufficient.  The terms of the contract must include the types of services, rate of payment, and the number of hours for each service.  The terms must be specific and verifiable.  The payment of services must represent the local fair market value of services; otherwise, payments would qualify for uncompensated transfers.  Any payments made prior to the execution of the contact are considered uncompensated transfers. 

An advance lump-sum payment is considered an uncompensated transfer of assets for the portion of services that have not yet been performed.  A statement of the physician indicating the types of series will need to be included in the Medicaid application.  

The party will have to determine the tax treatment of the services.  The caregiver can be treated as an independent contractor or as an employee.  If the caregiver is treated as an independent contractor, a 1099-misc with a 1096 will need to be prepared.  The caregiver will pay self-employment tax.  If the caregiver is treated as an employee, then the contract needs to be in writing, a W-2 form shall be issued, and nanny tax needs to be paid.  The employer will have to complete a Form SS-4 to apply for an EIN number and each employee must fill out Form I-9 and a W-4 form.  The employer is responsible for paying FICA (Medicare and social security tax), FUTA (federal unemployment tax), and SUTA (Virginia unemployment and income tax). 

Finally, the employer may, but is not required to, withhold income taxes from each employee’s paycheck.  Some employers may be required to pay worker’s compensation.