Q. if I claim the dependent care credit (DCC), on my tax return, will that affect her?
A. Maybe.
If you claim a tax benefit (e.g. DCC), then she must claim the income. But, it may still not be enough to trigger a tax liability. It depends on whether, she baby sits in you home or hers. if she sits in your home, she is a household employee, and as a grandparent, exempt from social security and Medicare tax. If the $5200 is her only income, other than social security, she will pay no tax. But, she should file, so her income matches your deduction (actually, tax credit).
If she sits in her home, she may be considered self employed and subject to security and Medicare tax (reported as " security and Medicare tax", about 15% of the $5200). Some, in this forum, argue that it can be reported as hobby income and not subject to security and Medicare tax.
