Home care sits at an awkward intersection of the tax code. You’re running a business with W-2 caregivers, but you’re also operating under domestic-service labor rules that were written for a very different era — and both sets of rules moved this year. If you process payroll for caregivers, 2026 brings new dollar thresholds, a still-unsettled overtime picture, and a brand-new reporting obligation that lands squarely on your W-2s. Here’s what an experienced advisor would flag.
1. The 2026 numbers your payroll needs to be running
Three federal figures reset for 2026, and getting any of them wrong compounds across every paycheck:
- Social Security wage base: $184,500 (up from $176,100 in 2025). The rate is unchanged at 6.2% each for employer and employee. Most caregivers earn well under the cap, so in practice you’ll withhold 6.2% on essentially all their wages.
- Medicare: 1.45% each, no wage ceiling. An Additional Medicare Tax of 0.9% kicks in on an employee’s wages above $200,000 in a year — employee-only, no employer match. Rare in home care, but your system still has to catch it if a caregiver holds multiple roles at your agency.
- FUTA: 6.0% on the first $7,000 of each employee’s wages, reduced to an effective 0.6% once you claim the full 5.4% state credit. That credit shrinks in a handful of “credit reduction” states, so the effective rate isn’t universal.
For agencies, the combined employer-side FICA of 7.65% plus FUTA is a real line item on thin home care margins. The advisor’s point: these are per-employee, per-year mechanics, and high-turnover workforces multiply the number of times each threshold has to be tracked correctly. This is precisely the arithmetic [Your Company] automates so a caregiver who works three weeks in January and returns in September doesn’t quietly reset a wage base you thought was settled.
2. The overtime question every agency is asking — and why the answer is “it’s complicated”
This is the big one for 2026, and it’s easy to get dangerously wrong.
Background: from 1975 to 2013, third-party home care agencies could treat companionship and live-in caregivers as exempt from federal minimum wage and overtime. A 2013 DOL rule (enforced from 2015) took that exemption away from agency employers — meaning most caregivers became entitled to time-and-a-half.
In 2025, the pendulum started swinging back. On July 2, 2025, DOL proposed a rule to restore the companionship and live-in exemptions for third-party agencies. On July 25, 2025, DOL issued Field Assistance Bulletin 2025-4, telling its own investigators to stop enforcing the 2013 rule.
Here’s where agencies get into trouble. A non-enforcement bulletin is not a change in the law:
- The 2013 rule is still the law. No final rule has been issued. DOL has simply chosen not to enforce it for now.
- The bulletin does not touch private lawsuits. Caregivers and plaintiffs’ attorneys can still sue for unpaid overtime under the 2013 rule, and that’s historically where most home care wage claims originate.
- Courts are still enforcing it. In April 2026, the Sixth Circuit upheld the 2013 rule as valid in DOL v. Americare — even after the Supreme Court’s 2024 Loper Bright decision — finding DOL had express authority to define these exemptions.
- State law runs on its own track. New York, New Jersey, California and others require overtime regardless of the federal posture. An agency that stops paying overtime based on the federal bulletin can be fully compliant with DOL and still be exposed under state wage law.
The advisor’s read: do not change your overtime practices based on the non-enforcement bulletin alone. The prudent move is a state-by-state analysis with employment counsel before touching a single pay rule, and payroll configured to keep paying overtime where the law — federal or state — still requires it. [Your Company] configures overtime rules at the state level and preserves the timekeeping records that survive an audit or a plaintiff’s discovery request, so you’re not betting the agency on a bulletin that could be reversed.
3. “No tax on overtime” — what it actually does (and the new job it hands your W-2 team)
The One Big Beautiful Bill Act (OBBBA, signed July 2025) created a temporary deduction employees hear about as “no tax on overtime.” For a workforce that logs a lot of overtime hours, caregivers will ask about it. Here’s the accurate version:
- It’s an income-tax deduction of up to $12,500 ($25,000 for joint filers), available for tax years 2025 through 2028, phasing out above $150,000 MAGI ($300,000 joint).
- Only the premium portion counts — the extra “half” of time-and-a-half required by the FLSA, not the full overtime paycheck.
- Critically for payroll: overtime is still fully subject to Social Security and Medicare tax. Nothing about your FICA withholding or employer match changes. “No tax” refers only to a slice of the worker’s income tax, claimed on their return.
The part that lands on you: reporting. For tax year 2025, the IRS granted transition relief (Notice 2025-69) — separate W-2 reporting was optional, but you still had to give employees a reasonable approximation of their qualified overtime (often in Box 14 or a year-end statement). Starting with tax year 2026, separate reporting is mandatory, the W-2 is being updated, and there’s a revised 2026 Form W-4 with a worksheet for employees expecting overtime or tips. Your payroll system has to isolate the qualifying overtime premium from regular wages all year long — you can’t reconstruct it in January.
The advisor’s point: this is a tracking problem disguised as a tax break. Agencies still capturing overtime as one lump sum need their systems reconfigured now for the 2026 mandate. [Your Company] already separates qualified overtime at the paycheck level and populates the new W-2 fields automatically — turning a compliance headache into a checkbox.
4. The misclassification trap: caregivers are almost never independent contractors
The single most expensive payroll mistake in home care is issuing a 1099 to a caregiver who is legally an employee. When you control what work is done and how it’s done — schedules, tasks, methods — the worker is your employee, full stop, regardless of what any agreement says.
Get it wrong and the bill is brutal: back Social Security and Medicare (often both halves, because the IRS generally won’t let you retroactively collect the employee’s share), back FUTA, and penalties on top. It also cascades into workers’ comp and state unemployment exposure. In an industry the DOL has historically targeted for enforcement, misclassification is low-hanging fruit for an auditor.
The advisor’s point: “1099 to save on payroll tax” is not a strategy — it’s a deferred liability with interest. Running caregivers as proper W-2 employees through [Your Company] closes the exposure and produces the clean records that make an audit boring.
5. Don’t forget the household-employer segment (Schedule H)
Part of the home care market isn’t agencies at all — it’s families hiring a caregiver directly, and consumer-directed / self-directed Medicaid programs where the client (or a fiscal intermediary) is the employer. Different rules apply:
- The household-employee FICA threshold is $3,000 in cash wages for 2026 (up from $2,800). Cross it and Social Security and Medicare become mandatory on all of that employee’s cash wages for the year — not just the amount above $3,000.
- The FUTA trigger is separate: $1,000 in total cash wages to household employees in any single calendar quarter. The classic error is filing a Schedule H with the FICA columns filled in and the FUTA column blank because the family only heard about the first number.
- Household employers file Schedule H with their personal Form 1040 (no quarterly 941s), and generally pre-pay via estimated taxes or extra withholding to avoid an underpayment penalty.
The advisor’s point: families and self-directed clients rarely realize they’ve become employers until they’ve already crossed a threshold. [Your Company] handles household-employer registration, W-2s, and Schedule H worksheets so a family caring for an aging parent isn’t blindsided at tax time — a natural add-on service for agencies that also support consumer-directed clients.
The 2026 home care payroll checklist
- Update your Social Security wage base to $184,500 and confirm FUTA credit-reduction status for your states.
- Keep paying overtime unless and until counsel confirms a specific federal and state basis not to — the 2013 rule and state laws remain live.
- Reconfigure payroll to isolate qualified overtime premiums and populate the new 2026 W-2 fields; roll out the revised 2026 W-4.
- Audit every 1099 caregiver against the control test — reclassify before an auditor does.
- For direct-hire and self-directed clients, track the $3,000 FICA and $1,000-per-quarter FUTA thresholds independently.
None of this is optional, and most of it is invisible until it’s a penalty notice. If you’d rather your team spend its hours on care instead of on wage bases and Schedule H, that’s the conversation [Your Company] is built for.
This article is for general information and is not tax, legal, or accounting advice. Home care wage-and-hour rules are unsettled at the federal level and vary significantly by state; consult qualified employment counsel and a tax professional for your specific situation.
Sources
- IRS, Publication 926, Household Employer’s Tax Guide (2026) — thresholds, rates, wage base: https://www.irs.gov/publications/p926
- IRS, Topic No. 756, Employment Taxes for Household Employees: https://www.irs.gov/taxtopics/tc756
- U.S. DOL, Fact Sheet #25, Home Health Care and the Companionship Services Exemption: https://www.dol.gov/agencies/whd/fact-sheets/25-flsa-home-healthcare
- U.S. DOL, Direct Care Worker / Domestic Service Final Rule FAQs: https://www.dol.gov/agencies/whd/direct-care/faq
- IRS, One, Big, Beautiful Bill Act — Deductions for Working Americans (overtime/tips deduction, reporting): https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors
- IRS, FAQs on the qualified overtime deduction (Fact Sheet 2026-01): https://www.irs.gov/newsroom/treasury-irs-issue-faqs-to-address-the-new-deduction-for-qualified-overtime-compensation-under-the-one-big-beautiful-bill
DOL Field Assistance Bulletin 2025-4 (July 25, 2025) and the Sixth Circuit’s April 2026 decision in DOL v. Americare Healthcare Services are the primary references for the companionship-exemption enforcement status described in Section 2.