No forms are necessary. In the event she is becomes a Household Employee (she only works at your home), issuing a W-2 to her may make it easier for her to file her tax return, but it would not technically be necessary.
If she is receiving payments for work that are over $4050 a year, no, your brother can not claim her as a dependent. She would claim her own exemption on her own tax return.
However, because she is family, you *MIGHT* consider altering your arrangement. In the event that you decide to give her random "Gifts" throughout the year (not directly connected with her watching your child), then she would need to file a tax return, and your brother could still claim her as a dependent. Depending on ALL of her circumstances, that may or may not be the best result. If she needs Social Security credits or ACA Health Insurance, that might not be the best result. If she does not need either (if she has Medicaid), that might be the best result.
Yes, if her income is over $11,770 (2017 amount), she would qualify for the Premium Tax Credit to greatly reduce the cost of her health insurance bought through the Healthcare Marketplace (assuming she meets all of the other requirements). On the other hand, with no income, she may qualify for free Medicaid (if she is not a US Citizen and has lived in the US for less than 5 years, she may not qualify for Medicaid until the end of the 5 year period).
