Difficulty of Care (DOC) payments are a unique but critical part of payroll for home care agencies working with Medicaid-funded programs. If you manage caregivers who live with the individuals they serve, mishandling these payments can create compliance issues, unnecessary tax burdens, and caregiver dissatisfaction.
In this post, we’ll break down:
- What DOC payments are and why they matter
- Who qualifies for DOC payments
- How to handle their special tax treatment
- The risks of managing them manually
- How modern payroll software like Everee simplifies the entire process
What are Difficulty of Care (DOC) payments?
Difficulty of Care payments refer to compensation made to caregivers under a state Medicaid Home and Community-Based Services (HCBS) Waiver program. These are non-medical support payments for services provided in the caregiver’s home to individuals with physical or intellectual disabilities.
Under IRS Notice 2014-7, DOC payments are excluded from federal income tax if:
- The caregiver and the care recipient live in the same home
- The payments are made under a qualified Medicaid waiver program
- This federal tax exclusion can save caregivers thousands of dollars annually.
Who’s eligible for Difficulty of Care payments?
To qualify for DOC tax treatment, both the caregiver’s role and the care arrangement must meet certain criteria:
✅ The caregiver must live in the same home as the person receiving care
✅ The services must be authorized and funded by a Medicaid HCBS Waiver program
✅ Care must involve support with activities of daily living, not medical care
✅ The caregiver can be related or unrelated to the care recipient
How are Difficulty of Care payments taxed?
DOC payments have a very specific tax profile:
| Tax Type | DOC Payment Status |
| Federal Income Tax | Excluded (W-2 Box 1 should reflect $0) |
| Social Security & Medicare (FICA) | Included |
| Federal Unemployment (FUTA) | Included |
| State Income Tax | Varies (e.g., included in PA) |
| 1099-NEC / 1099-K for contractors | Excluded, if DOC-eligible |
Important: Even though these payments are tax-exempt federally, they must still be reported properly to the IRS and SSA—especially for Social Security earnings and benefits tracking.
The problem with manual Difficulty of Care payroll
If your payroll system doesn’t support DOC payment logic, here’s what you’re stuck with:
❌ Manually tracking which caregivers live with clients
❌ Splitting shifts between DOC and non-DOC hours
❌ Overriding tax treatment each payroll run
❌ Risking W-2 errors and IRS penalties
❌ Spending hours reconciling payments, exemptions, and state differences
For agencies managing hundreds of caregivers and clients, this quickly becomes unmanageable.
Why payroll automation matters
Automating DOC payments eliminates guesswork and ensures every caregiver is paid correctly and compliantly. The benefits include:
✅ Fewer tax errors and reduced audit risk
✅ Caregivers keep more of their earnings
✅ Improved retention through faster, more accurate pay
✅ Time savings for payroll admins and HR teams
✅ Confidence that your agency is aligned with IRS guidance
How Everee automates Difficulty of Care payments
Everee is a modern payroll platform built for the complexity of home health agencies. Here’s how we make DOC payments effortless:
- Worker- and shift-level DOC tagging
Mark individual caregivers or shifts as DOC-eligible and Everee does the rest. - Accurate tax adjustments
Everee automatically applies IRS Notice 2014-7 rules—no federal withholding, but still calculates FICA, FUTA, and state taxes where applicable. - W-2 and contractor compliance
Everee populates W-2 Box 1 correctly and includes Box 12 Code “II” for excluded income. No 1099s for exempt DOC payments. - State-specific logic
Operating in Pennsylvania? Everee ensures DOC payments show up in Box 16 for state income tax. Other states? We adjust accordingly. - Bulk payroll + reporting
Run payroll in minutes—even for hundreds of shifts. Plus, generate audit-ready reports filtered by DOC eligibility.
FAQs about Difficulty of Care (DOC) payments
Q: Are DOC payments taxable?
Federal income tax: no. FICA, FUTA, and some state taxes: yes.
Q: Do all caregivers qualify for DOC payment exclusion?
Only if they live in the same home as the client and are paid via Medicaid waiver programs.
Q: Can I issue 1099s for DOC payments?
You should not, if you have written confirmation they qualify under IRS Notice 2014-7.
Q: What happens if I get it wrong?
You risk over-taxing caregivers or under-reporting income—both of which can trigger IRS penalties or caregiver dissatisfaction.
Ready to make Difficulty of Care payroll easy?
If you’re still doing DOC payments manually or using software that doesn’t support tax-exempt wage logic, it’s time to upgrade. Everee is the only payroll platform designed with home care agencies in mind.
👉 Book a demo to see how Everee simplifies DOC payments, improves caregiver satisfaction, and gives your team hours back every week.
👉 Want to learn more about these payments? Get your free copy of the ultimate guide to Difficulty of Care (DOC) Payments for home care agencies below:
