Actually #1 is correct. She does not file a tax return because the filing threshold for a dependent, with earned income, is $6350 (2017) ($12,200 in 2019). She can still be your dependent.
You must issue her a w-2. If she is under 18, you do not have to withhold FICA. You should not give her a 1099-Misc.
Reference: https://www.irs.gov/businesses/small-businesses-self-employed/family-help
You do not put your dependent's income on your return*, even if she has enough income to have to file
*There is an exception If her only income is from interest and dividends, Alaska PFD or capital gains distributions shown on a 1099-DIV,
