If your mother in law provided the care in your home, she will generally be considered your household employee, and you are required to issue a W-2 for her wages. Because she is your parent (or the parent of your spouse) you are not required to withhold or pay social security or household employee taxes, you would just put the gross pay in box 1 and box 16 for your state. She files her return with the W-2.
If she provided the care in her home, she will generally be considered self-employed. She files her own tax return as a self-employed person. She reports the income on schedule C and can deduct business expenses related to her use of her home for business purposes. You are not required to give her any tax forms, and she would report her income using her own business records of her income and expenses.
