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All receipts should be kept.
In order for your SIL to be paid through a state program/Medicaid, your MIL will have to meet the income & asset guidelines. In your state, the asset limit for home & community baised wavers (the waiver that would allow your SIL to be paid by the state) is $2,000.
They can help with the contract and inform you of the state laws for paying a caregiver.
I always recommend using a payroll service. They will ensure that all of the insurances and taxes are taken care of. This protects everyone involved because it is obviously not gifts when you are paying abc payroll vs. SIL, so no issues with Medicaid. It is well worth the money to get all this dealt with by professionals. Your SIL will have workmans compensation insurance in the event that she gets hurt caring for mom, she will be getting matched SS/MEDICARE, she will also be able to get unemployment benefits in the futre by using a payroll service. Some even offer health insurance for the "employees" at huge group rates. I do recommend checking out several of them to find the best one. They also do all the quarterly and annual filings required when paying someone.
I want to give a big shout out to you and your wife for valuing your SIL enough to know that her caregiving is valuable and she should be paid for providing that service. Well done!
This site has so much information on all things elderly. Use the search function.
Good luck and very thoughtful to want to pay SIL for that care. Are you sure 25 hours a week is enough?
I would also add that the contract be for a set period of time, it can be "renewed" .
But as a person declines more not less help is needed. This would require more hours and more "work" due to that I feel that the pay should increase with the amount of work that needs to be done. So a 6 month review would be good and at that time your Sister in Law can decide A) she wants to continue and pretty much everything is the same. B) she wants to continue but mom has declined and she is spending more time and doing more tasks so she would like more money. OR C) This is more than she bargained for and she can not do it any longer and does not want to continue being a caregiver.
At that point family decisions need to be made as to who will care for mom, a family member, hired caregivers or place her in AL with dad.