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Tax Tips for In-Home Daycare Providers
You have made the decision to take on one of the most challenging activities—becoming a daycare provider. Whether you care for one child, or several, it’s important to keep in mind that you are operating a business and you should keep accurate income and expense records. You can operate your business as a sole proprietorship, partnership, corporation, or limited liability company (LLC).
Before you begin operating as a daycare provider, you must investigate the licensing requirements. Not all states require licensing or registration of daycare providers. Some states will require that you obtain a license if you care for a certain number of children. You must contact your state licensing authority and find out whether they require you to have a license. Whether they do or not, your business deductions are the same.
All the fees you collect for providing daycare services are reported as taxable income. If you are operating your business as a sole proprietor or partnership, the IRS also requires you to pay self-employment tax on your income. If you operate your business as a corporation, you are an employee of that corporation and should pay yourself a reasonable wage for the services you provide.
There are several different types of expenses that relate to a daycare business that are deductible. Keep in mind that the IRS allows you to deduct all ordinary and necessary expenses incurred in conducting this activity. Some of the more common expenses are: - Advertising
- Insurance
- Office supplies
- Legal and professional fees
- Licensing or registration fees
- Toys
- Clothing
- Diapers
- Automobile expenses. You may either deduct your actual expenses for operating your vehicle for business purposes, or you may use the standard mileage rate. For 2007, the standard mileage rate is 48.5 cents per mile. The rate increases to 50.5 cents per mile in 2008.
- Education and training expenses to maintain or improve your skills
- Special equipment such as highchairs, cribs, strollers, first aid kits, etc.
- Food – either actual costs of the meals you provide or a standard rate:
| 2007 | 2008 | | Breakfast | $1.06 | $1.11 | | Lunch/Dinner | $1.97 | $2.06 | | Snack | $0.58 | $0.61 |
As a daycare provider, you may be eligible to participate in a food program administered by the Department of Agriculture. These reimbursements are taxable to the extent they exceed your food costs. If your food costs are more than your reimbursements, the difference is a deductible expense. As with all expenses, if you are reimbursed, you must reduce your deductible costs by the reimbursement.
When you conduct a business activity in your home, you are allowed to deduct the expenses that relate to the use of that space. If you use space in your home on a regular basis for providing daycare, you may be able to deduct the business expenses for that part of your home even though you personally use the same space. To qualify, you must meet the following requirements:- You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves.
- You must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center under state law. You do not meet this requirement if your state rejected your application or revoked your license or any other authorization.
The key to deducting the costs for the business-use of your home is to maintain accurate records of the time spent providing care and the square footage of all the rooms you use for daycare on a regular basis. This is referred to as the time-space percentage. This percentage is important because it represents the proportion of your home that you use for business. You can apply this percentage to all the otherwise deductible expenses of maintaining your home.
To calculate the time-space percentage, you need an accurate measurement of the total square footage of your home and the square footage of just the rooms used for your daycare business. The next figure is the total number of hours you spent providing care. The time-space percentage is equal to the total number of hours used for business divided by the total number of hours in a year (8,760). This figure is multiplied by the square footage used for business, then divided by the total square feet of your home.
Your customers may ask you to provide them with your social security number or, if you have employees, your federal employer identification number. This will enable them to claim the child and dependent care credit on their tax return for the amounts they pay you. They should provide you with Form W-10, Dependent Care Provider’s Identification and Certification, for you to complete.
As with any small business, keeping accurate records is a must. Maintaining your income and expenses on a monthly basis will make filing your tax return easier once tax time arrives.
March 31, 2008
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