That’s what I do. I have scanned thousands of family slides and photos. I put them in a directory named for the year of the photo, if available. If I don’t know the exact year, they go into a folder for the approximate decade.
In the root folder is a document where each photo is entered by name, along with any other information about the photo. You can then record what was on the back, but also what a relative told you about the picture, your own thoughts about it, information you gleaned from later research, etc. Even restoration notes if you get there. Having all that in one searchable document is handy - and the easiest way to record that info.
I would NOT modify the picture to include the text at the bottom. For one thing it’s a lot of work, and for another metadata just doesn’t belong inside the image as far as I’m concerned.
Other details:
Store the raw image from the scanner, and do any cleanup on a copy. When I do this kind of work the scanned photos go into a single folder called ‘raw’ or ‘unprocessed’ under the root folder of the project and the sorted, restored photos get the treatment described above.
So, I wind up with a directory like this:
[root]
…[Old Family Photos]
…[Unprocessed]
…[1940s approx]
…[1941]
…[1942]
…[1950s Approx]
…[1956]
…[1958]
…FamilyPhotos.txt
Don’t use JPG for this. JPEG is a lossy format, and if you open and edit the image multiple times it can really degrade. I prefer PNG as a good compromise between quality and file size.
Don’t store the metadata in a commercial program like Picasa - it locks you into using Picasa. Keep all your archive data application agnostic.
There might be a lot of people interested in those photos for various reasons, so I would keep the originals. Forget about the family members for a minute - old street scenes from a small town or city may be of interest to their respective historical societies, for example. I have donated a number of otherwise uninteresting pictures to my city’s history archive because they contained pictures of now-demolished buildings or pictures of school assemblies from the past, etc. When going through the photos, keep an eye out for interesting things in the background.
If you are going to restore any of them you should open a restoration thread. Some of us could help out for fun or just give some advice to fix some common issues. If you open an imgur or similar account you could post examples of damaged images for advice.