"He created a single member LLC and pays an employee to help out."

Is this a licensed group home? You don't typically make a foster family into an LLC and you don't hire through the LLC for residential help. You hire a household employee, not an LLC employee.

And you mention both foster care and difficulty of care. Foster care income is not the same as difficulty of care income. Are they getting both, or only a specific one? Foster care payments are not reportable as taxable income, and on the other hand, there are no expenses to write against that (including that labor).

In my State, you would need to be licensed for that number of foster children, and at a certain point, you need to be licensed as a group home, especially if these are adult individuals placed in your care under a plan of care.

If these are adult individuals choosing to live in a communal environment, and that is being paid for by their regular income sources (vet, SDI, ABLE Trust, etc), not under supervision, then this is like a room rental income relationship?

Lots of mixed messages here.