Home Caregiver vs Agency: Tax Differences

When someone in your family needs care at home, one of the first decisions you'll face is: do I hire a caregiver directly, or go through an agency?

Both options work. But they have very different implications for your taxes, your budget, and your day-to-day experience. Understanding these differences up front saves headaches later. (For a broader overview, see our caregiver taxes guide.)

The Core Question: Who Is the Employer?

Everything about taxes flows from one question — who controls the work?

According to IRS Publication 926, whoever directs when, where, and how the caregiver does their job is the employer. And the employer is the one responsible for payroll taxes, W-2s, and Schedule H.

There are three common arrangements, and each one answers that question differently.

Direct hire

You found the caregiver yourself — through Care.com, a friend's recommendation, your church, a neighborhood Facebook group. You set their schedule, decide what tasks they perform, and pay them directly.

You are the employer. Full stop.

Agency hire

You contacted a home care agency. They sent someone. The agency sets the caregiver's pay rate, handles scheduling, and can send a replacement if your caregiver calls in sick. You pay the agency a flat hourly rate — they pay the caregiver.

The agency is the employer. You're just a client.

Registry or placement service

This is the one that confuses people. A caregiver registry or placement service helps you find a caregiver — they screen candidates, run background checks, and match you with someone. But once the match is made, you pay the caregiver directly and manage the relationship yourself.

You are the employer. The registry just made the introduction.

Think of it this way: a registry is like a recruiter. They help you find someone, but you're the boss. An agency is like a staffing company — they employ the worker and bill you.

How to Tell Who the Employer Is

Still not sure? Here's a simple test based on IRS guidelines:

If most of your answers fall in the left column, you're the employer. If they fall in the right column, the agency is.

The gray area: Some agencies operate as a hybrid — they help you find a caregiver but then step back from management. If the agency doesn't handle payroll, can't send replacements, and doesn't control the worker's schedule, you're likely the employer even though an agency was involved. When in doubt, ask the agency directly: "Do you issue a W-2 to the caregiver, or do I?"

The Full Comparison

How the two approaches stack up across every dimension that matters:

Cost

The savings from direct hiring are real — often $15,000–$30,000 per year for full-time care. But you're trading money for responsibility. The agency handles the administrative burden; a direct hire means that's on you.

Tax Responsibility

With a direct hire, you'll spend roughly 15 minutes per quarter on tax tasks if you use a payroll service — more if you're doing it manually. Our household employer calculator can show you exactly what you'll owe.

Flexibility and Control

Direct hire gives you maximum control. You pick the person, set the terms, and build a direct relationship. Agency hire gives you a safety net — if your caregiver quits or gets sick, the agency handles the scramble.

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The Hidden Cost of Agency Care

That 30–60% markup covers real services: recruiting, background checks, insurance, payroll administration, and backup coverage. For some families, that's worth every penny.

But what many families don't realize — a large chunk of that markup is pure profit margin. The caregiver working through an agency often earns $15–$22/hour while you're paying the agency $30–$45/hour. When you hire directly, more of your money goes to the person actually providing care.

This matters for retention. A caregiver earning $22/hour directly from a family is often happier — and stays longer — than one earning $17/hour from an agency while knowing the family is paying $35.

The Hidden Cost of Direct Hiring

Direct hiring isn't free of overhead either. Here's what you're taking on:

Upfront work (one-time):

• Get an EIN — takes 5 minutes at irs.gov (see our EIN guide)
• Run a background check — $30–$75
• Have the caregiver complete W-4 and I-9 forms
• Register for state unemployment insurance — check your state's requirements
• Get workers' compensation insurance — varies by state

Ongoing work:

• Run payroll each pay period — minutes with a service like NannyKeeper
• Make quarterly estimated tax payments — four times per year
• Issue a W-2 by January 31
• File Schedule H with your tax return in April

With a payroll service, the ongoing work is manageable. Without one, it's a real time commitment — especially the quarterly tax calculations.

When Agency Care Makes Sense

Not every family should hire directly. Agency care is typically the better choice when:

You need immediate care. If your parent was just discharged from the hospital and needs someone tomorrow, an agency can mobilize fast. Building a direct-hire relationship takes time.

The care needs are medical. Licensed home health agencies can provide skilled nursing, physical therapy, and medication management that an independent caregiver typically can't. Medicare may cover some of these services.

You want backup coverage built in. If reliable, uninterrupted coverage is critical — and you don't have a backup plan for sick days — the agency's bench of caregivers is valuable.

You don't want to be an employer. Some families simply don't want to deal with payroll, taxes, and HR responsibilities. That's a valid choice, and the agency premium covers that convenience.

Multiple family members share the cost. When siblings split the cost of a parent's care, having an agency as a single billing entity is simpler than figuring out who's the "employer" among three kids.

When Direct Hiring Makes Sense

Direct hiring tends to be the better choice when:

Long-term care is the goal. If your parent needs ongoing daily care for months or years, the savings from direct hiring compound dramatically. That $20,000/year savings becomes $60,000 over three years.

Continuity matters most. Your parent builds a relationship with their caregiver. Agency caregivers can be rotated or replaced; a direct hire is your person.

You want to choose exactly who provides care. Agencies assign caregivers. When you hire directly, you interview, vet, and select the person you trust most.

Budget is tight. Senior care is expensive. If the choice is between 20 hours of agency care and 30 hours of direct-hire care for the same budget, more hours of care may serve your parent better.

You're already a household employer. If you already have a nanny or housekeeper on payroll, adding a caregiver to your existing setup is straightforward.

A Real Cost Comparison

Say your parent needs a caregiver 30 hours per week in North Carolina. Here's how the numbers compare:

Direct hire at $20/hour

Agency at $32/hour

Direct hire saves: $15,392/year — and the caregiver earns $3–$5/hour more than they would through the agency.

Use our household employer calculator to run the numbers for your state.

The Registry Trap

This deserves its own section because it catches so many families off guard.

A caregiver registry or referral service charges you a one-time placement fee — typically $500–$3,000 — to match you with a screened caregiver. After the placement, you manage the relationship directly.

Many families assume the registry handles the employment side. They don't. Once the caregiver starts working in your home and you're paying them, you're the employer. Period. That means you owe payroll taxes, you need an EIN, and you'll file Schedule H.

Red flags that you're actually the employer (not just a client):

• You pay the caregiver directly (not the registry)
• The registry has no ongoing involvement after placement
• You set the caregiver's schedule and duties
• The registry can't send a replacement

If any of these sound like your arrangement, read our caregiver payroll guide for exactly how to set things up.

What About Medicaid Waiver Programs?

Some states offer Medicaid waiver programs (like Consumer Directed Personal Assistance Programs) that let families hire caregivers — sometimes even family members — with Medicaid funding. In these programs, a fiscal intermediary typically handles payroll and taxes. You're technically the "employer of record" in some states, but the fiscal intermediary manages the paperwork.

If your parent receives Medicaid and qualifies for one of these programs, check with your state's Medicaid office. The tax situation is different from a purely private-pay arrangement.

FAQ

Can I switch from an agency to a direct hire?

Yes, but check your agency contract first. Many agencies include a "conversion fee" or non-compete clause that prevents you from hiring their caregiver directly for 60–180 days after the agency relationship ends. These clauses are common and usually enforceable.

What if I hire a caregiver directly but through a payroll company?

Using a payroll service like NannyKeeper doesn't change who the employer is — you're still the employer. The payroll service just handles the tax calculations and paperwork on your behalf. You're paying for convenience, not shifting employer status.

My sibling and I both pay the caregiver for our parent. Who is the employer?

Whoever controls the work is the employer. In practice, one sibling should be the official employer (with an EIN) and handle the W-2. The other sibling can reimburse them. Having two employers for one caregiver creates unnecessary complexity. Learn more about family caregiving situations at our family member taxes page.

Do I need workers' compensation for a direct-hire caregiver?

Most states require it for household employees. This is especially important for caregivers — the work involves physical lifting, fall risks, and sometimes medical tasks. Check your state's specific requirements. Policies for household employers typically cost $200–$800 per year.

Can a caregiver be an independent contractor?

Almost never. If you control when and how the caregiver works — setting a schedule, directing duties, providing supplies — they're an employee. The IRS is clear on this point. Misclassifying an employee as a contractor can result in back taxes, penalties, and interest. Read our employee vs. contractor guide for the full breakdown.