Read This Before Handing
Your Family Child Care Taxes
Over to an Accountant
The information on this page is intended to give providers an overview, and basic understanding, of family child care taxes and issues that go with it so that, whether she files her own taxes, or hires a professional accountant to file them for her, she will know, at the very least, what records to keep, what deductions are allowed and what documents or forms she needs to file. A provider should never assume that his accountant is familiar with family child care taxes. It is absolutely imperative that a provider learns as much as possible about family child care tax responsibilities –and yes, benefits – or he may end up either paying way too much in taxes, or in trouble with the IRS.
One of the first things you want to do is get a Tax ID number (also called TIN or EIN) if you do not already have one. You can apply online here. It takes just a few minutes. You really should have a tax ID number or you will be giving parents and agencies your SSN number, and you don’t want to do that. Many people think they need to be an employer to get a tax ID number. That's not true.
To complete his or her family child care taxes, most providers must file, at minimum, the federal forms below for his or her business:
* Form 1040 - U. S. Individual Income Tax Return
* Schedule C - Profit or Loss from Business
* Schedule SE - Self-Employment Tax, and
* Form 8829 - Expenses for Business Use of Your Home
There may be other forms a provider will need to file which may not necessarily be related to the business, based on his or her individual situation.
To learn more and to download tax forms and instructions, visit the IRS website.
Some general information to remember when filling out your family child care taxes:
Make sure to include all taxable income from both parents and subsidy programs. And, don't forget to claim all your allowable deductions, both those that are 100% business use, and those that are shared business and personal use.
Also, don't forget to keep track of transportation costs, including mileage for business. The Standard Mileage Rate for 2010 is .50 cents per mile.
Many providers find this next section to be the most confusing thing about family child care taxes. But if you just take it one step at a time, you will find that it is not really so complicated.
Use the Time-Space Percentage to calculate the business use of your home. To figure out your Time-Space percentage, add up the total number of hours spent working in your home for the business during the year and divide it by the number of hours available in the year (8,784 hrs). This is your Time percentage. Remember to include time spent:
* Caring for children
* Preparing food for the children
* Planning Curriculum and activities
* Cleaning after the children leave or before they arrive
* Interviewing or talking on the phone to parents
* Doing paperwork before or after your normal business hours, including taxes and record keeping
Then do the same for the space. Figure out the total area of your home you use for your business and divide it by the total area of the home. That is your Space percentage.
Now, multiply the percentages for both Time and Space together to get your Time-Space percentage. Use this formula to determine business use of shared business and personal expenses such as:
Home repairs and maintenance or improvements
Home and personal property depreciation
Utilities (gas, oil, electric, garbage, water, sewer and cable or satellite)
Probably the biggest expense providers have is food expenses. The easiest way to figure out how much you are allowed to deduct for food costs is to use the Standard Meal Allowance Rate.
Keep a daily record of all meals and snacks you serve to all the children enrolled in your program throughout the year.
You are allowed to deduct up to one breakfast, one lunch, one supper, and three snacks per day, per child served.
Add up the numbers of each meal served during the year and multiply by the following rates for the 2010 tax year: Breakfast $1.19, Lunch/Supper $2.21 and Snacks $0.66. Add it all up, and you have your deduction for your food expenses.
These rates are true through June 30th, 2010. The federal government generally increases these rates slightly every July.
Claiming Your Food Expenses Handout
You can use this method to determine your deduction for food expenses regardless of whether or not you participate in the Child Care Food Program. If you are not participating, I highly recommend contacting your local Resource and Referral Agency to find out more information. The Food Program reimbursements might not cover 100% of your food costs, but it really helps!
If you are an employer:
* You and/or your accountant, will also file Form 941- Employer's Quarterly Federal Tax Return.
* Apply (register) for a state Employer Account ID
www.edd.ca.gov (note: If you are not in California, you should go to your states official website and go to the section on ‘business’ or ‘employers’)
* If you have an assistant that works with you and the children in your family child care, either part-time or full-time, he or she is your employee, not an independent contractor. You cannot pay them on a 1099. Many providers do not know this and claim payroll expenses on their taxes when they shouldn’t.
How do you determine if a person is an employee or an independent contractor? From the IRS:
Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner. If you have the right to control or direct not only what is to be done but also how it is to be done then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.
As the family child care owner, you most definitely are directing the work of your assistant. He or she is an employee. In order to claim your payroll costs on your taxes, you need to have your employee on your payroll and you need to be paying payroll taxes.
However, there may be other contractors that you use that you can pay on a 1099 like gardeners, a housecleaning service or a music and movement teacher that comes in and gives a class for example, but does not work directly for you. Here is some more information from the IRS:
Form 1099 Misc.
Payments for services performed for a trade or business by people not treated as its employees are reported on a Form 1099 Misc. Example: fees to subcontractors or directors.
A 1099 Misc. must be filed when a contractor is paid $600 or more. There is no limit to the amount a contract or can be paid on a 1099 Misc.
When to report: If the following four conditions are met, you must generally report a payment as non-employee compensation.
• You made the payment to someone who is not your employee;
• You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
• You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and
• You made payments to the payee of at least $600 during the year.
If you have the opportunity to take a class or workshop on family child care taxes, I highly recommend it. If you are going to pay someone to do your taxes, ask other providers who they use. If possible, find someone who specializes in family child care taxes.
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