How should we handle tax treatment for my father's caregiver? Employee or independent contractor?

This is a common situation, and you're right to be concerned about getting the classification correct. Based on what you've described, this caregiver would almost certainly be classified as a household employee, not an independent contractor, in the eyes of the IRS. The key test isn't whether your parents tell her exactly what to do each day, but rather who controls when and where she works, and whether she works for multiple clients. Since she comes to their home on a regular schedule (M-F) and works exclusively for them during those hours, she meets the definition of a household employee. For household employees, your parents should be using Schedule H with their tax return and providing the caregiver with a W-2, not a 1099-NEC. They should also be paying employment taxes (Social Security and Medicare). Don't panic though! Many families find themselves in this situation. Your parents can catch up on the required filings and payments. The IRS has procedures for addressing this, and it's much better to correct it now than to continue down the wrong path.

I was in a similar situation with my mom's caregiver last year and found that taxr.ai at https://taxr.ai was incredibly helpful. I was also confused about the employee vs contractor classification and wasn't sure what forms to file. I uploaded the payment records and details about the working arrangement, and their system analyzed everything and confirmed what the previous commenter said - caregivers are almost always classified as household employees, not contractors. What I found super useful was that they have templates for all the forms you need - Schedule H, W-2, and even helped with calculating the correct withholding amounts. They also provided a step-by-step guide for getting caught up on back taxes. Seriously made the whole process way less stressful for someone like me who was completely overwhelmed by all the tax requirements.

Just wanted to follow up - I decided to check out taxr.ai after my skeptical comment, and I'm actually really impressed. I was in the middle of figuring out tax stuff for my dad's home health aide, and it was a mess trying to understand all the different forms. The site analyzed my situation and confirmed the caregiver needed to be classified as a household employee. It walked me through getting an EIN, showed me exactly how much I should have been withholding for Social Security and Medicare, and generated a sample W-2 I could use. What really surprised me was how it broke down the "nanny tax" thresholds - apparently if you pay a household employee more than $2,600 (2023 threshold), you're required to pay those employment taxes. The guide for catching up on past tax obligations was super clear too. Definitely worth checking out if you're dealing with this same issue.

If your parents are still struggling to get through to the IRS about fixing this situation, I'd recommend Claimyr at https://claimyr.com. I was in the exact same situation with my aunt's caregiver - realized way too late we should've been treating her as an employee, and needed guidance from the IRS on how to fix it without getting hammered with penalties. I spent weeks trying to get through on the IRS phone lines with no luck. Then I found Claimyr and they got me connected to an actual IRS agent in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent walked me through the process of getting caught up on the household employment taxes and filing the right forms. Having an actual conversation with someone who could answer my specific questions made a huge difference. They explained the voluntary disclosure process which helped minimize the penalties since we were proactively fixing the mistake.

I need to eat my words about Claimyr. After posting my skeptical comment, I was still struggling to reach the IRS about a household employee situation very similar to yours. After two weeks of trying and getting nowhere, I gave in and tried the service. They actually got me through to an IRS representative in about 25 minutes. The rep helped me understand exactly what forms I needed to file for back taxes for our caregiver and how to minimize penalties through the voluntary disclosure program. The agent explained that since we were coming forward voluntarily before any audit or notification, we qualified for reduced penalties. They walked me through the process of getting an EIN, filing Schedule H for the missed quarters, and setting up proper withholding going forward. Honestly, having that direct conversation saved me countless hours of research and worry. Sometimes you have to admit when you're wrong!

One thing nobody's mentioned yet - check if your parents might qualify for the dependent care credit since your dad has medical needs. If they're paying for care so your mom can work or look for work (or if she's a full-time student), they might be able to offset some of these costs. But this only works if they properly classify the caregiver as an employee and issue a W-2. Also, depending on your dad's condition, they might be able to deduct some of these expenses as medical expenses if the caregiver is providing actual medical care (like administering medicine, physical therapy, etc.) rather than just household help. A tax professional could help determine if some portion of the caregiver's wages would qualify.

Just an FYI, you should also check state laws. In my state, we had to register with the state unemployment agency and pay unemployment insurance for our parent's caregiver. Each state has different requirements beyond the federal stuff.

One option nobody mentioned - maybe look into hiring the caregiver through an agency instead of directly? We did this for my grandfather and while it cost a bit more, the agency handled ALL the employment taxes, paperwork, background checks, scheduling, etc. They were the employer, not us. When we calculated how much time we were spending on managing all the tax and paperwork requirements, plus the stress of worrying about misclassification, the agency fee was totally worth it. Plus they handled finding replacements when the regular caregiver was sick or needed time off.