I agree with Tom's first line of thought (the second thought only applies to Household Employees, so that does not apply).
However, if Grandpa has enough income that they need to file a tax return anyways, reporting it on Line 21 as "other income" will probably cost MORE in taxes. That is because a daycare provider who has a business can deduct A LOT of things, resulting in a low profit (or often a loss). The Income taxes on the FULL cost of "other income" would likely be more than the combined total of the Income taxes and SE taxes for the PROFIT of the "business".
