We met a lady that does home health, she has become a friend! How do we pay her and also keep track of what she spends to be able to show to Medicaid if they have to go to NH later?

Do not give her charge of the finances. Send grocery gift cards, and more when she e-mails you a receipt. She should be willingly providing you with all receipts, needing to ask you for funds for their care.
Be sure to notify her if her meals are included.

Have a contract, references, background check.

A friend leaves way too much leniency for taking extras from your parent's budget.

Still, I would be generous, not making her job more difficult by becoming a tightwad with parent's money. Keep her pay separate from the household budget. She is not to advance her own money for your parent's needs. Have boundaries, and rules.

If you provide her an I-phone on your account, you will know e v e r y t h i n g.

Be sure she knows not to move in her boyfriend, or other family members.
She will have her own home to go to on her days off? Place a value on the room rental
and adjust her pay accordingly.
Since she is an employee, a friend, AND a live-in caregiver, consider a rental agreement as well as a caregiver contract. One always needs to consider an exit strategy, as anything can happen. Have your documents lined up in advance.

There are threads on here started by others who have had issues getting rid of "friend".

References & background check. Then a contract outlining duties, hours, vacation, pay, etc. Then use a payroll service that will withhold social security and income tax. You will need to match social security. Don't forget unemployment insurance and worker's comp.

Set up a petty cash fund of $250. She should accumulate receipts and submit them to you and you will replenish the fund. At all times, the cash on hand and the unreimbursed receipts will total $250. The agreement should spell out what types of receipts your will reimburse.

She is an employee. The biggest mistake most people make is not keeping the communication professional so that she can discuss problems that she is having with the job and so that you don't feel that your parents are being taken advantage of.

Before all that, do a reference and background check. Have her complete a routine job application that you can find a blank copy of on the internet.
If she has an issue with this, that would be a huge red flag for me.

JKrystal - I’d like to add some thoughts on what I see as pretty serious red flags in your in laws situation & I say this as one who went through Katrina. In laws had their trailer flooded from Hurricane Harvey so they are getting post disaster housing due to Harvey, right??? FEMA trailer, right? So probably on 18 months rental assistance from FEMA.

Probably also gotten $$, supplies, foodstuffs, donations due to their Harvey situation as well. You wrote in an earlier post their getting SBA loan too.

If so, their applications - FEMA, SBA, county outreach, etc. - were approved & based on their living situation prestorm. FEMA, SBA regs are pretty exacting & they do follow up. Having someone move in & live rent free, I’d bet is so out of compliance for FEMA. The friendly caregiver is not family dropping over for an occasional overnite or a caregiver with a TXDADS program. For those suggesting “rent”, In-laws cannot charge rent nor can they do a rent-free living arrangement as they do not own the trailer. It’s FEMA property. 
JKrystal- You mention she’d be living on the property but in her own place, so is this caregiver lady too in a FEMA trailer? So this is a FEMA village? If so is it both homeowners who flooded and renters whose apts or subsidized housing flooded? Does she want to be paid cash so doesn’t affect her relief eligibility? 

Disasters bring out opportunities to start anew as well as con artists. If word has gotten out that in laws did SBA, then word on the street will assumed that they have 240k fresh SBA $$$. You’ve already posted about fil giving $ to some guy in the ‘hood for helping out, checkbook stolen, they are unable to manage to pay their bills.

If their health deteriorates, they’ll need to move into a facility. If they need to apply for Medicaid, they will need to clearly show where $ was appropriately spent or family will face dealing with a transfer penalty inquiry by Medicaid. This oh so friendly caregiver needs to be paid all aboveboard with FICA & taxes & notarized caregiver agreement to keep that $ from looking like an issue for Medicaid. Or hire a caregiver through an agency. 

Was any consideration given to them moving into an AL or NH rather than going the FEMA trailer and SBA loan to get a new home? 

I want to yell "danger, danger, Will Robison!".

Storms bring out the grifters. Your FIL has dementia and is going to progess. It is much easier to get a demented elder acclimated to an AL when they are in the early stages. 

When he needs 24/7 care, what are your options going to be for getting "friend" off the property?

Any "friend" showing up after a natural disaster is suspect, especially since the neighbors have already allegedly committed check fraud. Your parents will be viewed and targeted by so many. Would it be better to move them now to AL, since you won't be there nearby?

We didn't do the SBA loan after all. Haven't received the FEMA trailer. They have their own property not in city limits. I appreciate all of your concerns. We had a long discussion with her yesterday and she even told us it would be better if we called her agency that she works thru. We are getting a contract drawn up also. Thanks again for your responses!!

Jkrystal5, "their Dr. said this would be ideal for them!!!". Ah, not really. It would be better to use an Agency where there are 3 shifts of caregivers, the night shift would be required to stay awake throughout the night to listen for any sounds. This way, the morning caregiver comes in all refreshed from getting a good night sleep, same with the other two shifts.

If you feel you still want a live-in caregiver, you will need to go to your parent's home insurance carrier and have your parents purchase a "workman comp" insurance in case the live-in caregiver gets hurt on the job.

With an Agency, the Agency is licensed, bonded, insured, and they have workman comp for their employees. Plus they do the payroll, taking out taxes, etc.  Oh, speaking of payroll, check with your State to see if there are any laws limiting the number of hours a live-in caregiver can work.

Another thing, people get sick, thus who would take care of your parents if the caregiver has the flu, etc. or has to leave for a couple of weeks to take care of their own family member. That's why I liked using an Agency, if a regular caregiver couldn't make his/her shift, the Agency would have someone fill-in for that day or week.

All in all, my Dad found out it was less expensive for him to move to senior living, then to have around the clock caregivers. Plus he was around people of his own age group which he really liked. He really perked up when he moved in :) Plus he sold his house and was so relieved not to have to worry about property taxes, homeowners insurance, all utilities, shoveling snow, mowing the yard, etc.

Is she CPR certified? Any formal training in caregiving?
Have you done a criminal background check?
I know, I am very cynical. But there are bad people in this world just waiting for the right scenario. Scammers take time to watch and evaluate to plan their scam. How do you know that this woman hasn’t been doing just that?
Be cautious & good luck!

You are making a big mistake!!! You need to get professional care for your in laws. I emphasize “professional.” You sound like a very intelligent, capable person, but you came to this forum because you have some doubts. This solution to your problem seems too good to be true and; most likely, it is. More care will be needed in the future, so go in the right direction: agency or a living facility. You will have more peace of mind.