Great point regarding Pub 17. For Social Security / Medicare taxes, I think the distinction is made if the babysitter is under the age of 18 years and whether done in the employers home. You do count as wages if it is employee's principle occupation. The IRS exception is under the age of 18 your principle occupation is considered to be a student.
In our case, our 14 year old daughter earned babysittying money of $5200 split between two families -- $3000 from one and $2200 for the other. Because under age 18, the employer families not required to submit W2. Our daughter files earnings under Form 1040, Line 7, Miscellaneous Income.
Pub 926 was an attempt to better clarify the "nanny gate" issues that started several years ago. If under age 18, the babysitter is not required to pay SS/Medicare tax but is still responsible for income taxes (if income high enough to trigger). Also allows babysitter to open Roth IRA using earned income.
