In a medium saucepan, combine water, butter, sugar, and salt. Bring to a boil over medium heat.
Once boiling, remove from heat and stir in flour, baking powder, and vanilla extract until a dough forms.
Allow the dough to cool for about 5 minutes. Then, add the egg and mix until fully incorporated and smooth.
Preheat the air fryer to 375°F. Line the air fryer basket with parchment paper for easier cleanup.
Scoop out small portions of dough (about 1 tablespoon each) and roll them into bite-sized balls. Place them in the air fryer basket, ensuring they are spaced apart.
Air fry the churro bites for 8-10 minutes or until golden brown and puffed up. Shake the basket halfway through cooking for even browning.
While the churro bites are cooking, mix the 1/4 cup sugar and cinnamon in a shallow bowl.
Once the churro bites are done, immediately toss them in the cinnamon sugar mixture to coat.
Serve warm and enjoy!