Caregiver contracts

Why informal payment is a risk

Federal rules penalize transfers of assets for less than fair market value made within the look-back window for institutional and certain waiver Medicaid. The penalty's length is the amount transferred divided by the average monthly cost of nursing facility services in the state or locality.^[2] The mechanics are on the look-back page.

So the question a caseworker can ask about $1,500 a month moving from a parent to a child is whether that was payment for services or a gift. A written agreement, a market rate and records are how a family answers it. Without those, the answer has to be reconstructed years later from a bank statement.

An earlier version of this page said Medicaid presumes family care is free, that every dollar is treated as a gift, and that retroactive contracts generally do not cure it. We could not find a federal source for any of those as stated rules, so they are out. What is true is narrower and still worth acting on: the treatment is state-specific, it turns on fair market value, and it is much easier to document going forward than backward.

What a personal care agreement contains

AARP's guidance is to draw up a personal care agreement between caregiver and care recipient spelling out wages and the services to be provided and when, and to have an eldercare lawyer review it so that it meets tax requirements.^[1] In practice that means:

• Specific services in writing: personal care, meals, transport, medication management, household tasks. Not "help as needed."
• Hours and schedule, and what happens when the caregiver is sick or away. Respite belongs in a real agreement.
• A rate you can justify against what agencies and independent aides charge where you live. Keep the quotes or listings you based it on.
• Payment as the work is done, on a regular schedule, rather than a lump sum for care already given.
• Records: timesheets, invoices, and payments by check or transfer that match the agreement. Lodestone's free care log worksheet covers the daily-record half of this.

Have it drafted rather than downloaded. The Medicaid treatment is state-specific, and this is the document the whole arrangement rests on.

The tax side, with the 2026 numbers

AARP states it plainly: caregivers are legally required to report wages as taxable income.^[1] Beyond that, paying a caregiver in the home can make the person paying a household employer, which brings its own duties. IRS Publication 926 for 2026 sets the thresholds:^[3]

• Social Security and Medicare must be withheld and paid if you pay $3,000 or more in cash wages in 2026 to any one household employee. The Social Security wage base for 2026 is $184,500.
• Federal unemployment tax is owed if you pay $1,000 or more in any calendar quarter to household employees, on the first $7,000 per employee per year. These are two different tests and mixing them up is a common error.
• Family exclusions matter, and they cut both ways. Wages paid to your spouse, to your own child under 21, or to your own parent are generally excluded from these thresholds, with limited exceptions. So a parent paying an adult son or daughter aged 21 or over generally does count, while an adult child paying their parent for care generally does not. Which direction the money flows changes the answer.

Reported earnings also build the caregiver's own Social Security record, which is one of the things stepping back from work erodes. Tax treatment depends on who employs whom, the setting, the family relationship and age, so use the current IRS household-employer guidance or a tax professional rather than a rule of thumb. And keep the two questions apart: IRS rules answer the tax question. They do not decide how Medicaid treats the arrangement.

The awkwardness does some work

Drafting an employment agreement with your own mother feels clinical. One practical benefit is that it makes the arrangement legible to siblings, who are otherwise left to interpret bank statements years later. We have no evidence on how often a contract prevents a family argument, so treat that as a reason people give rather than a finding.

Two programs that pay family caregivers instead

• Self-directed Medicaid services. AARP says all 50 states and the District of Columbia offer a version of self-directed Medicaid long-term care, letting a person manage their own home-care services instead of an agency managing them — which is the route by which a family member can be paid.^[1] What the program is called, who is eligible, what it pays and whether a spouse may be hired all vary by state. Ask your state Medicaid program.
• The VA's Program of Comprehensive Assistance for Family Caregivers. Narrower than most families expect. The veteran must have a VA disability rating, individual or combined, of 70% or higher, be enrolled in VA health care, have been discharged or have a medical discharge date, and need at least six months of continuous in-person personal care. The caregiver must be 18 or over and either a family member or someone who lives full time with the veteran. You apply jointly. A veteran can name one Primary and up to two Secondary Family Caregivers. The Primary caregiver may receive a monthly stipend, CHAMPVA health coverage if not otherwise covered, free legal and financial planning help related to the veteran's needs, and at least 30 days of respite care a year.^[4] More on the veterans page.

Your Area Agency on Aging (1-800-677-1116) can say which programs operate in your state.^[5]

Where the public record stops

Whether a contract is right for you, what rate your market supports, how it interacts with a later caregiver child exemption claim, and how your state's Medicaid program treats it all belong to an elder-law attorney in your parent's state — the NAELA directory lists members.

What to ask them:

• What documentation of a fair-market rate does this state accept?
• How should payment be structured, recorded and reported here?
• Does this state's Medicaid program offer self-directed services instead, or as well?
• How should the agreement coordinate with the rest of the estate plan and with any future transfer of the home?
• We have already been paying informally. What can be done now?

Quick answers

Can my parent pay me to be their caregiver?

Yes, and the way to do it is a written personal care agreement signed before payments start, setting out the services, the schedule and a fair-market rate, with payments made and recorded as they are earned. AARP's advice is to spell out wages and services and to have an eldercare lawyer review the agreement against tax requirements. AARP also states plainly that caregivers are legally required to report wages as taxable income. Separately, all 50 states and DC offer some version of self-directed Medicaid long-term-care services, which can pay a family caregiver for an eligible recipient. [1]

What happens if my parent paid me informally without a contract?

It becomes a question about whether the money was payment for services or a transfer for less than fair market value. Federal rules penalize transfers for less than fair market value made inside the look-back window for institutional and certain waiver Medicaid, and the penalty length is the amount transferred divided by the state's average monthly nursing-facility cost. Whether a particular arrangement is treated as wages or as a gift is decided under the state's rules on your facts, so take it to an elder-law attorney in the parent's state sooner rather than later. [2]

What should a caregiver contract include?

Specific services rather than "help as needed"; hours, schedule and what happens when the caregiver is ill or away; a rate documented against what local agencies and independent aides actually charge; payment as the work is done rather than a lump sum for past care; and records — timesheets, invoices and traceable payments. Have it drafted by an elder-law attorney in the parent's state, because the Medicaid treatment is state-specific and the tax treatment depends on who is employing whom. [1, 2, 3]

Where to go next

• The caregiver child exemption
• The look-back rule
• Your job and the care
• The costs nobody itemizes