The person under the contract does not have to receive wages--anyone can work for free. The employer, however, would probably be violating employment law – for example, rules regarding minimum wage. If no one complains about the violation, it is unlikely there would be a problem. If the employee is not paid he or she doesn’t have to pay taxes.
If the employee is paid from the employer's estate, when the employee receives the money, he or she will have to report it as income and pay appropriate taxes. If the employee receives the wages as a lump sum, it may push the employee into a higher tax bracket. Also, it may have an effect on FICA or self-employment tax and the employee’s Social Security benefits in the future.
For information about personal service contracts, go here: http://www.elderlawanswers.com/caregiver-contracts-a-growing-planning-trend-for-families-5646
To find out if a personal service contract is right for you, talk to an attorney near you. To find an attorney, go here: http://www.elderlawanswers.com/elder-law-attorneys.