What Is a Caregiver Agreement and Why You Need One?

A caregiver agreement is a written contract between a person who needs care and the family member or other individual providing it, laying out duties, hours, pay, and duration. Families use one for a specific reason: without it, money paid to a relative for care looks like a gift, and that can wreck a future Medicaid application or create tax problems no one planned for. A signed agreement, in place before care begins, converts those payments into legitimate compensation for services rendered.

What the Agreement Has to Cover

The document needs to identify the care recipient, the caregiver, and the work being performed in enough detail that someone reading it years later can see it describes real services. Typical duties include personal hygiene assistance, meal preparation, medication management, grocery shopping, transportation to medical appointments, housekeeping, laundry, bill coordination, and communicating with health care providers.¹

Beyond the task list, the agreement should state:

The hourly rate or salary, pay frequency, and payment method.
The schedule, written with some flexibility — language like “no less than 20 hours a week” or “up to 80 hours a month” lets the arrangement adjust as needs change.¹
A defined duration, whether a term of years or the lifetime of the care recipient.
A termination clause that lets either party end the arrangement in writing.¹
A modification clause requiring any changes to be in writing and signed by both parties.¹
Signatures and dates from the caregiver and the care recipient.

Make clear that the caregiver’s services won’t duplicate work another paid provider is already doing. If a home health aide handles bathing and dressing, the family caregiver’s contract should cover different tasks. Overlap is one of the fastest ways Medicaid reviewers find a reason to challenge an agreement.²

Why Medicaid Makes the Agreement Essential

When someone applies for Medicaid to cover nursing home or long-term care, the state reviews every financial transaction from the previous 60 months. Any money transferred without receiving fair value in return is treated as a disqualifying gift.³

Consider what that means in practice. A parent pays an adult daughter $80,000 over three years for care but never signs anything. When the parent later applies for Medicaid, the state can reclassify the entire $80,000 as a gift. It divides that figure by the state’s monthly penalty divisor to produce a period of ineligibility. In a state with a divisor around $10,000, that’s eight months when the parent needs nursing home care but Medicaid won’t pay. The penalty period has no cap.

A properly drafted agreement avoids this because payments made under a legitimate contract, at fair market value, aren’t considered transfers. The contract is evidence that the family received services of equal value in exchange for every dollar paid.

Sign It Before Care Starts

For the agreement to hold up under Medicaid review, it generally must be signed and dated on or before the day services begin.² Backdated or scrambled-together paperwork drawn up after a family learns about the look-back rule tends to get rejected. If payments have already changed hands without a written contract, talk to an elder law attorney about the impact on future eligibility and how to plan around any resulting penalty.

One related rule sits outside the agreement itself but is worth knowing. Federal law allows a parent to transfer the family home to an adult child without a Medicaid penalty if the child lived there for at least two years immediately before the parent entered a nursing home and provided care that delayed institutionalization.³ That exception applies only to the home, not to cash compensation, and it operates independently of any caregiver agreement.

Pay a Fair Market Rate

The compensation written into the agreement has to match what a non-family caregiver would charge for similar work in your area. Paying above market is where families get into trouble, because the excess is treated as an uncompensated transfer during Medicaid review.²

Document how you landed on the rate. Get written quotes from two or three local home care agencies and keep them with the contract. If the state later asks how you set the number, having that evidence on hand is the difference between an agreement that holds and one that gets partially disallowed.

Tax Obligations the Family Takes On

Most families don’t realize that paying a relative to provide care creates household employer tax obligations. The IRS generally treats an in-home caregiver as a household employee rather than an independent contractor, because the family controls what work is done and how.⁴ Full time or part time, hourly or flat rate, the classification is the same.

To qualify as an independent contractor instead, the worker would have to control how the work is performed, run an independent business with separate insurance, and offer services to the public. A relative caring for a parent in the parent’s home almost never meets that test.

If you pay a household employee $3,000 or more in cash wages during 2026, you must withhold 6.2% for Social Security and 1.45% for Medicare, and pay a matching 7.65% from your own funds.⁵ If you pay household employees a combined $1,000 or more in any calendar quarter, you also owe federal unemployment tax on the first $7,000 of each employee’s annual wages. FUTA runs 6.0%, but a credit of up to 5.4% for state unemployment contributions usually brings the effective rate to 0.6%.⁶

You report all of this on Schedule H, filed with your Form 1040.⁶ Federal income tax withholding is optional for household employees — only done if the employee asks and you agree — but Social Security, Medicare, and FUTA are not. Skipping these filings creates two problems at once: an IRS exposure, and a Medicaid reviewer who may read the missing tax reporting as evidence that the arrangement wasn’t real employment.

Who Signs When a Parent Has Lost Capacity

This is where families often stumble. If the parent no longer has the mental capacity to sign, the person holding a power of attorney usually steps in. But if that same person is also the family member being paid to provide care, there’s a conflict: the agent is signing a contract that pays themselves.

An agent under a power of attorney owes a fiduciary duty to the principal. Signing a contract on both sides of a transaction is self-dealing, and even broadly worded power of attorney documents generally do not authorize it unless they say so explicitly. If the document is silent on self-dealing, a different family member or an independent third party should sign the agreement on the care recipient’s behalf.

The cleanest fix is to plan ahead. When a durable power of attorney is being drafted, ask the attorney to include language that specifically permits the agent to enter into personal care agreements, including ones that benefit the agent, as long as the compensation is at fair market value.

Workers’ Compensation

Hiring a family caregiver can trigger workers’ compensation obligations too, and the rules are state-specific. Many states require coverage at 40 or more hours a week, some set the threshold lower — as few as 16 hours a week, or a quarterly earnings test — and a few require coverage for all domestic workers no matter how few hours they put in. These rules apply even to a household with one employee. Going without required coverage exposes the family to personal liability if the caregiver is injured on the job. Check your state’s workers’ compensation board for the threshold that applies.

Putting the Agreement in Place

If Medicaid planning is any part of the picture, start with an elder law attorney. The cost of having one draft or review the agreement is small next to a penalty period that could run tens of thousands of dollars. Families with no Medicaid concerns can start from a reputable template, but both parties should still read every provision and adjust the terms before anyone signs.

Once the document is drafted, the caregiver and the care recipient should go through it line by line and confirm they understand it. Sign and date it before any care is provided or any money changes hands.² Use a witness or a notary — fees for a signature acknowledgment typically run $10 to $25 — which adds credibility if the care recipient’s capacity is later questioned. Give copies to everyone involved and store the original somewhere safe.

Pay through checks or bank transfers rather than cash, so there’s a paper trail that matches the terms. Ask the caregiver to keep a log of hours worked and tasks performed. Contemporaneous records are far more persuasive to a Medicaid reviewer than an agreement sitting by itself in a file drawer.

Revisit the agreement as circumstances change. Care needs expand, rates move, schedules shift. Any modification should be written and signed by both parties.¹ An agreement that once described 20 hours a week of light housekeeping but now covers 40 hours of intensive personal care needs updating, both to reflect what’s actually happening and to justify the higher pay the work now warrants.

1
Family Caregiver Alliance. Personal Care Agreements
2
Special Needs Alliance. The Pitfalls of Paying Family Members to Provide Care
3
Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
4
Internal Revenue Service. IRS Publication 926 – Household Employer’s Tax Guide
5
Internal Revenue Service. Tax Topic 756 – Employment Taxes for Household Employees
6
Internal Revenue Service. Instructions for Schedule H (Form 1040) – Household Employment Taxes