If you enter into a personal service contract do you pay taxes?

YES they report the income and pay taxes. The contract can be either "employee"(W-2) or "independent contractor" (1099). If the wages are not reported, the IRS will be upset and Medicaid will call it "gifting". Medicaid does not allow gifting and will stop benefits until the gift is paid back. It can get very messy.

Read the conditions on the Medicaid agreement. I don't know about Medicaid, but some payments made to family from the VA for care are not taxed. If you read the agreement and don't see anything, ask your Medicaid case manager how you should go about handling the payment.

NO MY SISTER WENT TO A LAWYER WITHOUT TELLING MY MOTHER AND GOT A PERSONAL SERVICE CONTRACT SAID IT WAS TO HIDE HER MONEY AND SAID SHE DOESNT HAVE TO PAY TAXES

Serenity777, A contract with your mother would have to be signed by your mother. The payments have to be reported as stated above. It sounds like one of you are confused; I'm not sure who.