Someone living in your home and being paid to work for you is a household employee. If you pay the household employee more than about $2000, you must issue them a W-2. You are not required to withhold income tax, and you are not required to pay household employers tax if the household employee is a parent. But you do need to issue a W-2. There are several online companies that will allow you to e-file a W-2 with both the employee and the IRS for a small filing fee. You will also have to decide whether you are paying one parent $12,000, or both parents $6000 each, for purposes of issuing the W-2.
At that level of income, your parents are not eligible to be claimed by you as tax dependents.**
** Note that if you paid one parent $12,000 and the other parent nothing, and if your parents filed separate tax returns, you could claim the nonworking parent as a dependent. This would get you a $500 tax credit. In some cases, a married couple can be at a disadvantage by filing separately instead of jointly, and someone would have to review their situation to understand whether there is a negative impact if you were to take the strategy.
However, you can use the wages that you pay to your parents for child care to qualify for the child and dependent tax credit, as long as care is provided so that you, and your spouse if married, can work or go to school full time.
If you don’t issue a W-2, there is a way for your parents to report the income on their tax returns anyway. However, it would be better all around if you paid the extra $10 or so to issue the W-2.
You are likely correct that your parents will not actually owe income tax, assuming they have no other taxable income. Remember that once a person is a US taxpayer (citizen or green card holder), they are required to report and pay taxes on all their worldwide income, so if your parent‘s have income from another country, that will be taxable in the US.
