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Payment for services provided to the employer, by those who share the individual's home address, are classified as “difficulty of care” payments instead of regular wages. Unlike wages, difficulty of care payment are excludible from federal gross income; therefore, they are not subject to federal income tax.

Payments, including payments made by third party insurers for sickness or disability, are not taxable income for Pennsylvania purposes. The employer should not include periodic payments for sickness or disability in box 16 of the employee's W–2 form.

The Difficulty of Care exemption is a program that allows caregivers to exclude income from caring for a person living in the same home from being included as gross income. This exemption can be difficult to apply for, as it requires significant documentation on the caregiver's behalf.

Interest Relief You can authorize someone to contact the IRS on your behalf. See if you qualify for help from a Low Income Taxpayer Clinic. If you can't resolve the penalty on your own, contact Taxpayer Advocate Service, an independent organization within IRS.

A difficulty of care payment is money paid to a non-relative or relative who is under contract with a public or private agency to give care to a person with a mental disability in his or her home.

Use Form 843 to claim a refund or request an abatement of certain taxes, interest, penalties, fees, and additions to tax.

More In Help. Can I receive a tax refund if I am currently making payments under an installment agreement or payment plan for another federal tax period? No, one of the conditions of your installment agreement is that the IRS will automatically apply any refund (or overpayment) due to you against taxes you owe.