IRS W-2 Box 12 Code II Meaning: Medicaid Waiver Payments

Direct answer: irs w-2 box 12 code ii means Medicaid waiver payments that are excluded from your gross income under IRS Notice 2014-7. These are payments for caring for an eligible person in your home under a state Medicaid waiver program. They do not go in Box 1. You do not pay federal income tax on them.

irs w-2 box 12 code ii: Medicaid Waiver Payments Excluded From Gross Income

The IRS General Instructions for Forms W-2 and W-3 define the code as: “Code II — Medicaid waiver payments excluded from gross income under Notice 2014-7.”

Notice 2014-7 covers certain payments to individual care providers. The payments must come from a state Medicaid Home and Community-Based Services waiver program. That program is described in section 1915(c) of the Social Security Act. It lets a person who would otherwise need care in a hospital or nursing facility receive care at home instead.

The IRS treats these payments as “difficulty of care” payments. They are excludable from gross income under section 131 of the tax code. In plain words, the payments are not counted as taxable income for federal income tax.

This code is about care, not retirement. It has nothing to do with a 401(k), a 403(b), or a 457(b) plan. If you are comparing retirement codes, read IRS W-2 Box 12 Code AA Meaning: Roth 401(k) Contributions and IRS W-2 Box 12 Code D Meaning: 401(k) Elective Deferrals. For the full list of codes in one place, see W-2 Box 12 Codes Explained: Complete Guide.

The Code II vs. Code EE Mix-Up

This mix-up is common, and it matters. Code II and Code EE sound alike. They mean very different things.

Code	What it means	What it is not
II	Medicaid waiver payments excluded from gross income under Notice 2014-7	Not a retirement contribution
EE	Designated Roth contributions under a governmental section 457(b) plan	Not a Medicaid payment
G	Elective deferrals and employer contributions to a section 457(b) plan	Not Roth, and not Code II

Code EE is the Roth 457(b) code. It applies only to a governmental 457(b) plan. It does not apply to a tax-exempt organization’s 457(b) plan. If your W-2 shows Code II, do not treat it as Roth money. If it shows Code EE, do not treat it as a Medicaid waiver payment.

Who Qualifies for the Code II Exclusion

Three facts must line up for the exclusion to apply:

1. The payment comes from a state Medicaid waiver program. The program must be a Home and Community-Based Services waiver program under section 1915(c). A private payment from a family member is not a Medicaid waiver payment.
2. The care is for an eligible person. The person must need care because of a physical, mental, or emotional condition. The IRS guidance says only amounts for the care of that person are excludable.
3. The care happens in the care provider’s home. The program is built around home care instead of institutional care. The person receiving care lives in the provider’s home.

You do not need to be related to the person you care for. The exclusion applies whether you are a family caregiver or not, as long as the program and payment rules are met.

Payments that do not fit these rules stay taxable. For example, a payment for something other than the care of the eligible person is not covered. Keep the program paperwork that shows your payments came from the waiver program. That paperwork supports the exclusion if the IRS asks.

How Code II Works With Box 1, Box 3, and Box 5

Code II payments are reported in Box 12 instead of Box 1. That is the whole point of the code. Box 1 holds taxable wages. Excluded payments do not belong there.

Here is what to check on your W-2:

• Box 1: Should not include the Code II amount. If Box 1 is blank or zero and you are not making the earned-income choice below, the IRS guidance says you do not need to report the W-2 amounts on your return or attach the W-2.
• Box 12 Code II: This is the record of the excluded payments. It tells the IRS why the money is not in Box 1.
• Boxes 3 and 5: These show Social Security and Medicare wages. They may still show amounts even when Box 1 is zero. Code II settles the federal income tax question. It does not by itself settle every payroll tax question, so check Boxes 3 and 5 against your pay records.

If your W-2 wrongly puts Medicaid waiver payments in Box 1, do not just ignore the problem. Ask the paying agency for a corrected W-2. A corrected form keeps your wage record clean and avoids a mismatch with the IRS.

The Earned-Income Choice for Credits

Here is the part most guides skip. Excluded from gross income does not always mean ignored for every tax purpose.

For open tax years, you may choose to include Code II payments in earned income when you figure the Earned Income Credit (EIC) or the Additional Child Tax Credit (ACTC). The payments must otherwise be earned income, such as wages. The choice is all or nothing. You must include all of the payments, not part of them.

If you are married and file jointly, and both spouses received qualifying Medicaid waiver payments, each spouse makes a separate choice about their own payments.

This choice can change your credits. For some lower-income caregivers, counting the payments as earned income increases a credit, even though the payments themselves are not taxed. For others, it may not help. Run the numbers both ways before you decide, or ask a tax professional to run them for you.

If you do not make this choice, and Box 1 is blank or zero, you do not need to enter the W-2 at all, per the IRS guidance. If you do make the choice, you will need the Code II amount to figure the credit.

Once a return is filed and a refund is due, you can follow Tax Refund Status to track it. Any refund the IRS issues posts to your transcript as IRS Code 846: Refund Issued.

What Code II Does NOT Mean

• It does not mean Roth 457(b) contributions. That is Code EE.
• It does not mean a retirement deferral of any kind. Code II is a care payment, not a pension contribution.
• It does not mean every caregiver payment is tax-free. Only qualifying Medicaid waiver payments for care are excludable.
• It does not mean you can pick part of the amount for credits. The earned-income choice covers all of the payments or none of them.
• It does not mean you should add the amount to Box 1. Box 1 already excludes it. Adding it back would undo the exclusion.

What To Do When You See Code II

Follow these steps, in order:

1. Confirm the source. Check that the payments came from a state Medicaid waiver program for home care.
2. Check Box 1. It should not include the Code II amount. If it does, ask the agency for a corrected W-2.
3. Decide about the credit choice. Compare your EIC or ACTC with and without the payments counted as earned income. Remember: all or nothing.
4. Keep your program records. Save proof that the payments were Medicaid waiver payments for care in your home.
5. Check your wage transcript if anything looks off. Pull it through the IRS Get Transcript tool and compare the wage figures to your W-2. If you are unsure how to read it, use How to Read an IRS Account Transcript: Step-by-Step Guide.
6. Ask a tax professional if you have mixed payments. If some payments qualify and some do not, get help sorting them before you file.

The official code list is in the IRS General Instructions for Forms W-2 and W-3. The Medicaid waiver rules are in IRS Notice 2014-7 guidance.

Related Guides

• IRS Transcript Codes: Complete List and Meanings
• IRS W-2 Box 12 Code DD Meaning: Health Coverage Cost
• IRS W-2 Box 12 Code E Meaning: 403(b) Elective Deferrals
• IRS W-2 Box 12 Code W Meaning: Employer HSA Contributions

FAQ

What does irs w-2 box 12 code ii mean?

It means Medicaid waiver payments excluded from gross income under IRS Notice 2014-7. The payments are for caring for an eligible person in your home under a state Medicaid waiver program.

Is Code II the same as Roth 457(b)?

No. Designated Roth contributions under a governmental 457(b) plan are Code EE. Code II is a Medicaid waiver payment, not a retirement contribution.

Do I pay federal income tax on Code II payments?

No, if the payments qualify under Notice 2014-7. They are excluded from gross income and stay out of Box 1.

Do I need to file a tax return if Box 1 is blank and I only have Code II?

Not for the Code II payments alone, per IRS guidance, if you are not choosing to count them as earned income for a credit. If you want the EIC or ACTC, you may need the figures to make that choice.

Can I count Code II payments toward the Earned Income Credit?

Yes, you may choose to include all of them as earned income for the EIC or ACTC, if they are otherwise earned income. You cannot include only part of them.

What if my W-2 puts Medicaid waiver payments in Box 1 instead of Code II?

Ask the paying agency for a corrected W-2. Box 1 should not include payments that are excluded under Notice 2014-7.

Disclaimer: This post is general information only and is not tax advice. Every tax situation is different. For advice about your own W-2 or Medicaid waiver payments, consult a qualified tax professional or contact the IRS directly.

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