My mother - who also lives with me, watched my daughter throughout the year of 2021 while I worked/looked for work. I paid her in cash and didn't think much of it. Will any documentation be needed to support the amount that I put down for childcare expenses on my return? Also, would she be considered an in home employee? being that she is my mother, and she does actually live in the home with me and my daughter?
There will be!
There are two ways to handle the documentation so that you can take the child care credit.
Your mother is a contract employee that you pay. If you paid her more than $600 for the year then you need to issue her a 1099 for the money she received. That way you have documented that she received the money.
Now she will have to pay tax on that money. She will also owe social security and Medicare on what you paid her in the form of self-employment tax.
The second way is to set your mother up as a household employee. She gets a W2 for that. You will attach a schedule H to your tax return where you will report how much you paid her and then you will pay the household employment taxes (Federal Unemployment Taxes) on the amount she earned. Because she is a grandmother and not technically a nanny she does not have to pay social security or Medicare on these monies but instead just pays regular income tax.
Either way, the only way you get a credit is by having paper work.
[Edited RobertB4444 01/19/2022]