Yes. If you are paying her to take care of your children then she must report this as self employment income, or you might be considered her employer if she does it in your home.
She will have self employment taxes on this income but it's not likely her social security will become taxable unless she is married and files jointly with her spouse.
If it is a gift from you to her there is nothing to report for either of you. This would mean you would not be entitled to the child care credit.
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