At least an hour before making the frosting, melt the caramels. Place the caramel bits in a microwave safe bowl and add the evaporated milk. Microwave in 20-30 second intervals, stirring between, until caramels are smooth and completely melted. This will take 2-3 minutes.
Allow the caramel to cool completely to room temperature. This is important! If you add the caramel when it is too warm, it will melt the butter in the frosting and it will not set correctly.
In a large bowl, beat together the cream cheese and butter using a hand mixer until well combined.
Add the powdered sugar and the vanilla extract. Beat again.
Add the cooled caramel to the frosting and beat for 2-3 minutes, scraping the sides of the bowl as needed.
The frosting is ready to use! If you need your frosting firmer, simply place it in the refrigerator. It will set firmer as it cools.