My FIL is moving back to his cottage in Maryland in June. We have caregivers lined up for him. Should we pay in cash or deduct tax?

I would recommend doing it through an agency. They will withhold all the taxes, SS, insurance, as well as be responsible for possible unemployment or worker comp payments. I definitely wouldn't pay in cash, because all the taxes have to be paid -- It's the law. You would also have a hard time deducting the pay on your FIL's taxes if you didn't have written record. Contracting and paying either as a client of an agency or as an employer will keep everything above board. Make sure that all the money is drawn from your FIL's account so that it can be deducted when tax time comes around.

Plus if you use an agency if there is a call out or a caregiver is unable to come, they will cover the shift,,, not call you

they have caregivers lined up. it could be relatives. the question is, pay cash or not

When you employ people you are responsible for paying your share of SS and with holding theirs and paying it in quarterly. There is the question of paying for workmens comp insurance which is mandatory and any impact on your homeowners insurance in the event of a caregiver getting hurt.
You can of course take the risk of paying in cash under the table. Your choice! If you hire through an agency they will take care of all the legal stuff but the hourly rate will be greater

Medicaid really dislikes past records that have cash paid for caregiving.

To be legal, they should pay them as an employee, since there will be incomes taxes, etc., due. If they choose to pay them under the table, then it is up to them.

You can do both but paying cash is no different than by check or electronic transfer for your purposes. The latter makes it easier for both your and the caregiver's record keeping.  If the caregiver works for an agency, s/he will receive less than half the amount that you pay. While it sounds nice in theory, agencies don't always have someone to cover should the care giver get sick or can't show up for some reason.
Keep contemporaneous records of exactly what you pay and report it on your income tax form. Remember that it is only deductible if it exceeds 2% of your adjusted gross income. Inform the caregiver that you will be treating them as independent contractors and they need to pay self-employment taxes on the amount they receive. If you are paying the person what you would have paid the agency, the caregiver should be delighted to do the extra paper work. Since you aren't a business, you shouldn't have to produce a Form 1099. This is entirely above board and legal.

I have paid for caregivers both ways. I started out paying cash for about 16 hours or so a week. Then I moved to 48 hours a week aide assistance after a year or so. I do know that paying cash is really not an option. According to the IRS site, caregivers are to paid thru a payroll service as W2 employees, they are not considered independent contractors. The IRS is looking at the caregiver industry much like the restaurant industry with the waiters and bartenders and their tips. The IRS wants their share of every dollar.
So when I moved to 48 hours I paid thru payroll utilizing the services of the accountant that my mother used for her businesses. Honestly, not the best idea I ever had, but it worked for the most part.
Then the POA announced that mom's money was running out and I had two months to figure something out. I know what you are thinking. Why was that my problem. Well, because mom lives with me and the other siblings, including this POA, are useless. So I started the process for Community Medicaid to keep mom home with me. My mom is disabled due to the dementia. Now the aides are paid thru an agency. I submit the timesheets and I'm done with that part. However, I am responsible for hiring and firing, with the support of the agency. If an aide does not show up or goes on vacation, the agency does not have people standing by to fill in. The upside of this situation is Medicaid is paying for the aides. The downside is the agency doesn't pay very well and it's hard to find good aides, and ones that will stick around for the long haul.
Your FIL is mobile with a walker and has all his mental capacities which is awesome. This way he can let you know of any issues that come up with the caregivers. It sounds like you may live a distance away, so it's important that he can talk to you and let you know what's going.
I believe if you do a little research you will find the IRS does not look at cash payment as being appropriate. Therefore, it would be hard to deduct that on your taxes. Also, different states may have different rules, so it is worth checking into. Take care of yourself and good luck.

Donna....the IRS is federal law.   Different states do not have different rules for federal IRS law.

You must treat the caregiver as an employee...that means doing the tax withholding and withholding for social security and Medicare tax. If you get caught not doing that it will be 100% on you to pay all the back taxes (including the portion that the employee would have paid) and serious penalities and fines. The IRS defines every in-home care giver as an employee!

Most people do get caught. The caregiver files a worker comp claim...oops..caught. The caregiver files for unemployment after the jobs ends....oops. Caught.   Caregiver list you as employer for insurance premiums...oops caught.    

There are several payroll services that will do this for you with minimum pain. Signup with one.

DoctorJC is the correct post. Unfortunately, the agencies aren't as reliable as some of the other posts lead one to believe. Also, my experience over the last 4 years is that you can screen the aide online as well as the agency does. Nowadays, the agency will also start trying to run up a huge bill if left unmonitored. One agency tried to charge me for 2 people, saying they had to relieve each other, overtime, etc. If you 1099 or use a payroll service, then that will alleviate overtime concerns.

You might consider looking into services of a payroll company. It will cost more than paying cash because of the taxes, social security, etc. that has to be paid ----and is legally required to be paid to the government. The payroll company will charge a small fee for their services, but it can be well worth it. They even prepare the W-2's at the end of the year.

The sticking point is always this: You should not be using your own money for your parents' care and I had many a professional telling me just that. And why? The answer is simple, e.g. you will need that money for your aging self.

Do it properly, for God's sake.

I was going to leave it there but I'm cross.

You've got caregivers lined up to spend 30 hours a week ensuring the safety and wellbeing of an elderly man living alone. Do you want this job done well? Do you expect professionalism and competence from these people? Do you hope to be able to rely on their personal integrity?

No, of course not: you're too busy wondering if you can slip them a few bucks under the table and not bother with little things like their employment status and tax records.

For your FIL's sake, I hope you were a bit more conscientious when it came to screening.

I would check your state's regulations.
See if you can have the caregivers sign an independent contractor agreement, and then they would be responsible for paying tax and all that. I would pay by check though, so you have a record of what was given.
Sure make it easier on you!

Savitta....

This is FEDERAL LAW. States cannot over rule federal law.

The FEDERAL IRS says ...every in home care giver (Every!) is an employee

This is bad advice you are giving. When this employer gets caught...the cost isn't HUGE. Your advice will lead to big financial trouble.

Thanks to everyone who shared their thoughts. The two caregivers that we have lined up have been carefully screened. One in fact is my FIL favorite caregiver at his assisted living facility. The other is great too. She had been with her last charge for 10 years. With my own research, I see too that we will need to employ the caregivers. Using a payroll service seems like a great idea. Once again you all have been great in sharing your expertise. Thank you.

KatieKate...sincere Q: there are independent contractors in every job out there....what makes caregiving different??