❌ Tax Mistake #2: Misclassifying Income
- Christina Nguyen
- Feb 14
- 2 min read
As an Adult Foster Home (AFH) owner, one of the easiest ways to overpay on taxes—or worse, trigger an IRS audit—is by misclassifying your income. Not all income is taxed the same way, and some payments, like certain Medicaid waiver payments, may even be tax-free—but only if they meet specific requirements.
🚨 Why Misclassifying Income is a Big Deal
When you misclassify income, it can lead to:
❌ Overpaying taxes by reporting tax-exempt income as taxable.
❌ IRS penalties for underreporting or incorrectly categorizing revenue.
❌ Confusion at tax time, making it harder to claim the right deductions.
Example: Medicaid Waiver Payments
Some Medicaid waiver payments are exempt from federal income tax under IRS Notice 2014-7. However, if you or your tax preparer mistakenly report them as taxable income, you could end up paying hundreds or thousands of dollars in unnecessary taxes!
Other Income Types to Watch
AFH owners often receive different types of payments, including:
✔️ Resident fees from private pay clients (taxable)
✔️ Medicaid or Medicare reimbursements (varies)
✔️ Government assistance programs (some may be tax-exempt)
✔️ Subsidies or grants (depends on purpose and source)
Each type of income may have different tax treatments, so keeping clear records is essential.
💡 Quick Tip: Track & Classify Your Income Correctly
To avoid mistakes, keep a detailed record of all income sources and confirm how they should be classified. Here’s what you can do:
✔️ Use separate accounts for different types of income to stay organized.
✔️ Label payments correctly in your bookkeeping software.
✔️ Verify tax treatment with a tax professional—don’t assume all income is taxable!
✅ Learn More: Get My Free Guide!
Misclassifying income is just one of the costly tax mistakes AFH owners make. To help you avoid IRS headaches and unnecessary taxes, I’ve put together a free guide just for AFH owners:
Inside, you’ll discover:
✅ Which income may be tax-free—and how to properly report it
✅ How to separate and track different revenue sources
✅ The most common tax mistakes AFH owners make—and how to fix them
Don't wait until tax season—take control of your finances now!
💬 Need help reviewing your AFH income classification? Let’s chat!
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