Do You Get a 1099 for Foster Care Income? Section 131 and Exceptions

No, in almost every case you will not get a 1099 for foster care income. The IRS instructions for Forms 1099-MISC and 1099-NEC tell payers not to report qualified foster care payments that fall under the Internal Revenue Code Section 131 exclusion, and that exclusion covers virtually every foster household. If a 1099 does land in your mailbox, it is usually an administrative error, and the money on it is generally still tax-free.1Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC

Why Agencies Skip the 1099 for Foster Care Payments

Section 131 of the Internal Revenue Code excludes qualified foster care payments from gross income. That includes both regular foster care payments and difficulty-of-care payments, which compensate for the added demands of caring for someone with a physical, mental, or emotional condition.2Office of the Law Revision Counsel. 26 USC 131 – Certain Foster Care Payments Because the money is not income to you, the state or licensed placement agency paying it has no reporting duty.

The 1099 instructions put a hard number on this. Payments are non-reportable when they cover fewer than 11 foster children under age 19 and fewer than six individuals age 19 or older.1Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC That threshold catches nearly every foster family in the country, so agencies routinely do not generate the form at all.

Three conditions have to hold for the payments themselves to stay tax-free:

  • The money comes from a state or local government, or from a foster care placement agency that is licensed or certified by the state.
  • The foster individual was placed in your home through that official channel, not through an informal handoff.
  • The care happens in your home.2Office of the Law Revision Counsel. 26 USC 131 – Certain Foster Care Payments

The statute does not care about your relationship to the child. Kinship placements through the state system, such as a grandparent or aunt licensed as a foster caregiver, get the same tax treatment as placements with unrelated foster parents.

When a 1099 Would Legitimately Show Up

A 1099 for foster care payments is not always a mistake. A few situations produce reportable, taxable income, and the form is correct when they apply.

Payments Above the Section 131 Caps

The exclusion runs out at specific numerical limits. Regular foster care payments are tax-free for up to five qualified foster individuals age 19 or older; payments for a sixth adult individual are taxable. Difficulty-of-care payments are tax-free for up to 10 qualified individuals under 19 and up to five individuals 19 or older. Anything above either cap is taxable and reportable on a 1099-NEC.1Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC

Emergency Holding Payments

Payments for keeping a bed open for emergency placements are taxable even when no child is currently in your home. The IRS treats these as income because you are being paid to hold capacity, not to care for a specific foster individual.3Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income

Foster Care Run as a Business

If the IRS classifies your foster care activity as a business, the Section 131 exclusion falls away and payments go on Schedule C, subject to self-employment tax at 15.3% for Social Security and Medicare.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The agency looks at whether you run a group home, employ staff, or advertise services. A typical family fostering children in their own home is not going to hit this bar.

What to Do If You Get a 1099 in Error

Getting a 1099 does not by itself make the money taxable. If your payments still meet the Section 131 criteria, they are still excluded, no matter what form the agency generated. But you have to handle it correctly on your return, because the IRS will match the 1099 to your Social Security number and expect to see the amount.

The first step is to call the agency and ask for a corrected form. If a correction is not going to arrive before your filing deadline, use the IRS procedure built for this problem: report the payment amount on Form 1040, then enter the excludable amount as a negative number on Schedule 1 (Form 1040), line 8s, which subtracts it back out of income.5Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income The method was written for Medicaid waiver payments on erroneous 1099s, but it works for any Section 131 payment that ends up on one.

Keep your placement paperwork within reach when you file this way. IRS matching may flag the difference between the 1099 and your reported income, and being ready with documentation is what makes that a five-minute problem instead of a months-long one.

The Payments Are Tax-Free, but the Child Can Still Cut Your Taxes

One thing worth knowing before you file: the fact that foster care payments do not show up as income does not stop you from claiming a foster child on your return. A child placed with you through a state agency, tribal government, tax-exempt placement organization, or court order can qualify as your dependent under the same tests as any other qualifying child, which opens the door to the Child Tax Credit, the Earned Income Tax Credit, and Head of Household filing status.6Internal Revenue Service. Dependents For most foster parents, that is where the real tax benefit shows up, not on any 1099.

Records That Protect the Exclusion

If the IRS ever questions why an amount on a 1099 is missing from your income, or why you subtracted it on Schedule 1, documentation is what settles the matter. Keep:

  • The formal placement agreement from the state agency or licensed placement organization, with the child’s name, date of birth, and placement date.
  • Statements from the paying agency showing amounts received and the periods they cover.
  • Proof that the placing agency is a government entity or state-licensed, which establishes that payments came through an authorized channel.
  • Receipts for out-of-pocket costs you paid for the child, which back up both a potential charitable deduction through the placing organization and your claim that you provided more than half the child’s support.7Internal Revenue Service. Charitable Contributions

Without these records, defending an excluded amount against an IRS notice gets harder, and if any portion of the payment turns out to be taxable, penalties for failure to file or pay run 5% of the unpaid tax per month and 0.5% per month respectively, each capped at 25%.8Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax A folder assembled before tax season is the cheapest insurance available.