To report the childcare expenses on your return, you will need to enter her social security number as the child care provider's tax identification number.
If you claim the dependent care credit, she will have to claim the money as income and pay social security and Medicare tax (15.3%), as well as income tax.
If she babysat in your home, instead of hers, she is classified as a household employee. Grandparents (parent of the taxpayer) are exempt from the "Nanny tax". That is, she will not have to pay social security and Medicare tax. But the income is still subject to some income tax.
If you pay a person in your home, most of the time they are your household employee and you must give them a W-2 and pay the household employee's tax (social security and Medicare). If they work in their home, then most of the time they are self-employed and are expected to file a self-employment tax return. @jfroistad
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