Q. My understanding is that tax rules are more relaxed when paying a grandparent. You don't have to file all the employment forms.
A. Yes, that's essentially correct.
Q You just pay her, and she claims it as miscellaneous income.
A. Not exactly. She does not claim it as "other" (misc) income. She claims it as self employment (Sch C) if she baby sits in her home and as household employee wages (line 1 of form 1040) if she sits in your home. It would be "OK" for a household employee to report it as other income, but not a self employed person. Household employee wages is "earned income". Other (misc.) income is not. So, it's usually better for her to call it wages.
Q. Would she have any special obligations for state taxes?
A. No, nothing special. What ever she claims on the federal return "flows to" the state return.
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