If your parents live in your home, and you provide more than half their financial support, and their taxable income is less than $4400 (each), then they qualify to be claimed as your dependents and you can’t claim the dependent care tax credit for paying them to watch your kids, even if you don’t actually claim them as dependents.
If they work for you in your home, they are your household employees. You are not required to withhold or pay household employees tax because they are your parents, but if you pay more than $2200, you must issue them a W-2. Again, this is per person, you can’t pay “your parents” as a combined unit. You could pay mom only, or dad only, or both individually, depending on what they do for you.
Incidentally, are they legal to work in the US? The IRS just wants their tax money and doesn’t care about legal status, but if they don’t have SSNs it will be much harder to issue the correct forms.
By combining the above answers, you will see that you can technically make your parents not your dependents (to claim the day care credit) if you pay more than $4450 to at least one of them and they file a joint return.
Since you must issue a W-2 for their wages, they will file a form 1040 tax return. They won’t owe income tax unless their total income is more than about $25,000, but if they live in the US, they must report all their world-wide income including foreign investments or pensions.
However, you must also be aware that by making them household employees, you may fall under state employment laws regarding hours worked, minimum wages, benefits, unemployment insurance, and other labor law issues. There may be exceptions for family members, but you need to determine that for yourself.
