The tax forms that you must file are dependent on:
- Your business structure;
- Whether or not you are required to make estimated tax payments band;
- Whether or not you have employees.
Note: ALL business structures, except C Corporations, are pass-through entities, which means that the entity is not taxed directly. All income and losses pass through to the owner who pays the corresponding taxes. While the business entity may not be taxed at the federal level, it may be taxed at the state level.
The IRS video provides a summary of what you need to know about federal taxes.
- Employer Identification Number, or EIN
- Bookkeeping Systems
- Business Structures
- Choosing a paid preparer
- Lesson Review
In the case of a sole proprietorship, there is no separate legal entity created for business activities. As the owner, you businesses are one and the same; therefore, the business is not taxed directly. The business is taxed indirectly, since the business profit/loss (reported on Schedule C) passes through to you (via Form 1040), contributing to your adjusted gross income. Adjusted gross income minus allowances for personal exemptions and itemized deductions is your taxable income.
While a sole proprietor is not required to maintain separate business and personal accounts, you are required to maintain accurate accounts. It is highly advised that personal funds not be commingled with business funds to the highest degree possible. Maintaining separate accounts aids in the preparation of tax forms and could prove beneficial in the case of an audit. See reasons you might get audited. See – Taxes/Record-Keeping: Separate Accounts
You will use Schedule C to report your business’ income and expenses and ultimately the net profit/loss.
Form Schedule C
- Direct payment from parents
- Subsidy program payments
- Start-up and other grants
- Child and Adult Care Food Program (CACFP reimbursements)
Note: Give private pay parents a receipt every time they pay and keep a copy of each receipt. Keep copies of checks received from subsidy programs, grants, and/or food reimbursements.
- Business use of home (rent/mortgage, mortgage interest, utilities, maintenance, home depreciation, etc.)
- Taxes and licenses
- Business & liability insurance
- Depreciation of property; property being any fixed asset that has a useful life over one year, i.e. computers, vehicles, office equipment, kitchen equipment, playground equipment, furniture, appliances, etc.
- Vehicle Use
- Bank charges
- Accounting services/Tax preparation
- Professional development
- Travel, meals, and entertainment
- Office expenses and supplies
- Repairs and maintenance
- Rental expenses
- Start-up expenses
- and so on
Business Use of Home (see Business Use of Home)
While utilities are generally an allowable business related expense (based on time-space percentage), the monthly expense for basic local telephone service is NOT an allowable business related expense. This is the case, even when the state requires you to have a telephone in order to be a family child care provider. Additional telephone charges incurred for business purposes are deductible to the extent substantiated. See deductibility of the telephone.
Family child care providers generally report their business portion of utility expenses in Form 8829.
(See Food Expenses & CACFP)
Taxes & Licenses
A childcare provider may deduct license fees, employer payroll taxes, business personal property taxes (not property taxes on your home), other business taxes, and other license expenses.
Depreciation of Property
Upon starting a family child care business, many personal’s only items, become shared use items/assets; you are entitled to depreciate the business use portion of those items/assets. Depreciation of these items/assets would begin on the opening day or the day the item/asset is actually placed in service.
Depending on their value and useful life, toys may either be deductible or depreciable (that is value is expensed over a number of years, based on item’s useful life).
Accounting Services/Tax Preparation
A provider may deduct the cost of accounting services and/or tax preparation on Schedule C. Ask your accountant/tax professional to provide fees for business versus personal tax forms separately.
Note: If personal deductions are itemized, then a provider can deduct the cost of preparing a personal tax form on Schedule A.
The deduction for gifts to children or their parents is limited to $25 per person per year.
Office Expenses & Supplies
Offices expenses and supplies can include anything used in a business including craft materials, household items, cleaning items, etc. Generally, a provider would use the time-space percentage to determine the business portion of these expenses.
Repair & Maintenance
These are repairs and maintenance that are NOT related to a provider home (equipment, appliances, toys, etc.), those are reported on Form 8829.
Deductions made for rental expenses are for costs incurred renting equipment or other, not rent paid on a provider’s home (this is reported on Form 8829.)
Start-up expenses are expenses incurred prior to opening a business. These include licensing fees, advertising costs, inspection fees, supply expenses, pre-opening payroll expenses, professional fees, and other miscellaneous expenses paid or incurred prior to opening day. These expenses cannot be deducted as a current expense. However, a provider may elect in the year the business opens to deduct $5,000 (or the amount of the actual start-up expenses if less) and amortize the remaining expenses. Uncollected payments are not permissible as a business deduction.
Note: In order for an expense to be deductible it must meet the criteria of “ordinary and necessary.”
It is important to maintain all receipts and supporting documentation for deductions. Receipts and/or other records (i.e. bank statements, canceled checks, credit card statements, attendance records, meal logs, calendar notations, ledger, digital files/spreadsheets, mileage logs, photographs, etc.) are needed to justify the data presented in a provider’s tax forms.
Before putting away receipts, mark which items were used exclusively for the business, were personal or shared. Store receipts in folders or envelopes containing similar expenses (toys, supplies, utilities, household items, etc.). Designated a specific area to archive receipts and organize records.
Although many deductible expenses relate to items used for both business and personal expenses, the business portion will generally be determined by the time-space percentage.
Form 8829, Expenses for Business Use of Your Home
A provider should use this form to figure the allowable expenses for business use of your home on Schedule C and any carryover the following year of amounts not deductible in the current year.
Form 4562, Depreciation and Amortization
A provider should use this form to claim deductions for depreciation and amortization (of computers, furniture, appliances, play equipment, toys, flooring, fences, home improvements, vehicle, etc.), expense certain property under section 179, and provide information on the business/investment use of automobiles and other listed property.
Form 1040, U.S. Individual Income Tax Return
A provider should use this form to file an annual income tax return. The net profit/loss of thebusiness would be reported on line 12 (this is the figure which appears on line 31 of your Schedule C.)
Schedule A (Form 1040), Itemized Deductions
A provider should use this schedule to figure personal (non-business) itemized deductions. In most cases, the federal income tax will be less if you take the larger of your itemized deductions or your standard deduction.
Note: The above is applicable to sole proprietors on a general basis; each provider’s specific needs and requirements may vary. You should consult an account or tax specialist regarding your business.
Resources and Links:
In addition to business taxes required by the federal government, a childcare provider will need to pay state and local taxes. Each state and locality has its own tax laws. Having knowledge of state tax requirement can help a provider avoid problems and save money. The most common types of tax requirements for small businesses are income taxes and employment taxes.
The links below provide access to key resources that will help you learn about your state tax obligations.
Nearly every state levies a business or corporate income tax. Your tax requirement depends on the legal structure of your business. For example, if your business is a Limited Liability Company (LLC), the LLC gets taxed separately from the owners, while sole proprietors report personal and business income taxes using the same form. Consult the General Tax Information link under your state for specific requirements.
In addition to federal employment taxes, business owners with employees are also responsible for paying certain taxes required by the state. All states require payment of state workers’ compensation insurance and unemployment insurance taxes. New York also requires a business to pay for temporary disability insurance:
Resources and links:
- Managing Your Tax Obligations
- Tax Help and Training
- Business Structure and Tax Implications
- Employment Taxes for Employers and Self-Employed Individuals
- Filing and Paying Your Taxes
- Tax Information for Specific Business Types
- Small Business Administration. (n.d.). Filing & Paying Taxes: Determine Your State Obligations
Ever wonder why some tax returns are eyeballed by the Internal Revenue Service (IRS) while most are ignored? Short on personnel and funding, the IRS audited only 0.86% of all individual returns in 2014. And the audit rate in 2015 fell to 0.84%. So the odds of being singled out for review are pretty low. For the most part, filers needn’t worry about an audit unless they are fudging on their taxes.
An individual’s chances of being audited or otherwise hearing from the IRS increase based on income level, the types of deductions or losses claimed, the business and whether foreign assets are owned. Math errors may draw IRS inquiry, but they’ll rarely lead to a full-blown exam. Although there’s no sure way to avoid an IRS audit, these 16 red flags could increase a provider’s chances of unwanted attention from the IRS.
Source: Taylor, J. (2015, December). 16 IRS Audit Red Flags. Kiplinger. Retrieved from http://www.kiplinger.com/slideshow/taxes/T056-S011-tax-audit-red-flags/index.html#KyPrrxyqsqTkVowm.99
Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.
Here are some tips to keep in mind when choosing a tax preparer:
- Check to be sure the preparer has a PTIN. All paid tax preparers are required to have a Preparer Tax Identification Number (PTIN). In addition, ask if the preparer belongs to a professional organization and attends continuing education classes.
- Check the preparer’s history. Check with the Better Business Bureau (BBB) to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For enrolled agents, check with the IRS Office of Enrollment. (Enrolled agents are licensed by the IRS and are specifically trained in federal tax planning, preparation, and representation.) For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.
- Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.
- Make sure the preparer is available. Make sure you’ll be able to contact the tax preparer after you file your return – even after the April 15 due date. This may be helpful in the event questions come up about your tax return.
- Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.
- Never sign a blank return. Don’t use a tax preparer that asks you to sign a blank tax form.
- Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.
- Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.
- Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Resources and links:
- Tax Topic 254 – How to Choose a Tax Return Preparer
- Choosing a Tax Professional
- Verify the Status of an Enrolled Agent
- How to Make a Complaint About a Tax Return Preparer
- How to Report Suspected Tax Fraud Activity
- IRS YouTube Videos: Choosing a Tax Preparer – English | Spanish | ASL
- IRS. (2014, February). IRS Offers Advice on How to Choose a Tax Preparer
When family childcare providers seek help from tax preparers, they often receive bad advice because the tax preparer doesn’t fully understand their business.
Here are four areas in the tax laws that are unique to the family child care business. Make sure that your tax professional understands them.
Following these rules will save you a lot on your taxes.
All businesses can deduct expenses that are “ordinary and necessary” for the business. The definition of ordinary and necessary is helpful, typical, appropriate and useful.
Since your business involves providing a home learning environment for children, as a childcare provider, you are entitled to deduct hundreds of household items used in your work. This includes furniture, appliances, kitchen equipment, cleaning supplies, cable television, lawn care, service contracts on your appliances, new doorbell, bedding, towels, floor polish, and so on.
Because of this, you should save every receipt for items that have anything to do with cleaning, repairing, or maintaining your home. For more information see the article, “What’s Deductible in a Family Child Care Business?”
Also, the book Family Child Care Recording Keeping Guide lists more than 1,000 allowable business deductions.
Note: You can only deduct a portion of items used personally as well as for the business. Use Time-Space %.
If your tax preparer determines that you can not deduct a household item, you can ask which IRS publications stated this. saying, You may need to explain how a particular item is helpful, useful or appropriate for your business.
Business Use of Your Home
As a childcare provider, you are entitled to deduct a portion of costs associated with your house including: property tax, mortgage interest, utilities (gas, oil, electric, water, garbage), house insurance, house repairs, house depreciation, and house rent.
Claim the Time-Space % of these expenses on IRS Form 8829 “Expenses for Business Use of Your Home.”
Your Time-Space % is based on the number of hours and the number of square feet in your home used for business on a regular basis.
You must add up all the hours that your home is used for business activities.
You can count the hours in which day care children are present in your home from the moment the first child arrives until the last child leaves. You can count extra time such as if parents pick up their children late, children stay overnight, or children come to your home on weekends to play.
You can also count all the hours that your home is used for business activities when children are not present. This includes hours spent on cleaning, lesson planning, parent interviews, record keeping, meal preparation, parent phone calls, time on the Internet, and so on.
Hours spent away from the home shopping or taking children to school cannot be counted. For more details, see the article, “How to Track Hours When Children Aren’t Present.”
Don’t let a tax preparer tell you there is a limit on the number of hours you can count. There has been Tax Court case where a provider who worked 98% of the year caring for children and another who worked sixteen hours a week in her home when daycare children were not present, have won.
Unlike all other home-based businesses, a childcare provider can claim a room as a business room if it is “regularly” used for business. Regular use means using it for business about two-three times per week. Children do not need to be in a room for a provider to count it as regular use (storage room, office, garage, laundry room, etc.). Such rooms can still be counted as regular use even if a provider’s state child care licensing rules prohibit children from entering them.
It’s not unusual for many providers to use all of the rooms in their home on a regular basis for their business.
All other home-based businesses can only count rooms that are used “exclusively” for business. However, family child care is the only business that can have both “regular” and “exclusive” use rooms. If your tax preparer questions this, refer him or her to Instructions on Form 8829, page 2 under the heading “Special Computation for Certain Daycare Facilities.”
Food Program and Food Expenses
Family child care is the only home-based business that has to the Child and Adult Care Food Program (CACFP). It is recommended that all childcare providers join the CACFP, which will bring financial benefits. For instance, food reimbursements received from the CACFP are taxable income with the exception of reimbursements received for a provider’s own children, which are not taxable income.
A provider can deduct up to one breakfast, lunch, supper, and three snacks per day, per child (if they are served). Food served to a provider’s own children is never deductible.
Meals or snacks that are not reimbursed by the CACFP do not have to be nutritious.
There is no need do not need to save food receipts if the standard meal allowance method is used for claiming food expenses.
However, a provider should keep a daily record of all meals and snacks served to daycare children, particularly those for whom the provider will not be reimbursed through the CACFP. For more information see the article “How to Claim Food Expenses.”
Remember, don’t let your tax preparer tell you that your food expenses should not be more than your Food Program reimbursements.
A childcare provider always wants to depreciate his/her home because house depreciation represents a substantial business deduction for you each year.
A provider is entitled to depreciate a home if he/she is licensed, has applied for a license or is exempt from child care licensing rules. Therefore, even if a provider only cares for one or two children and is not required to be licensed, he/she can still claim house depreciation.
When a provider sells a home he/she will owe tax on the depreciation he/she claimed or is entitled to claim. A tax preparer should not dissuade a provider out of claiming this depreciation. For further information, see the article, “Should You Depreciate Your Home.”
A provider is entitled to depreciate all household items owned before the business was established and utilized later in the business. This can include furniture, appliances, pots and pans, wall decorations, tables, chairs, beds, and so on. For more information, research how to conduct an inventory of these items.
It is recommended that a provider take advantage of all of these tax rules benefiting businesses. The book 2014 Family Child Care Tax Companion is designed to help providers and their tax preparer identify potential errors before filing taxes.
Source: Copeland, T. (2015, January 19). The Unique Tax Rules Affecting Family Child Care. Tom Copeland Blog. Retrieved from http://tomcopelandblog.com/the-unique-tax-rules-affecting-family-child-care
Excerpt from IRS Publication 3402
Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.
Go to IRS.gov and click on the Filing tab to see your options.
- Enter “Free File” in the search box to use brand-name software to prepare and e-file your federal tax return for free.
- Enter “VITA” in the search box, download the free IRS2Go app, or call 1-800-906-9887 to find the nearest Volunteer Income Tax Assistance or Tax Counseling for the Elderly (TCE) location for free tax preparation.
- Enter “TCE” in the search box, download the free IRS2Go app, or call 1-888-227-7669 to find the nearest Tax Counseling for the Elderly location for free tax preparation.
The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $53,000 or less, persons with disabilities, the elderly, and limited-English-speaking taxpayers who need help preparing their own tax returns.
The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.
Getting answers to your tax law questions.
IRS.gov and IRS2Go are ready when you are—24 hours a day, 7 days a week.
Enter “ITA” in the search box on IRS.gov for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response.
Enter “Tax Map” or “Tax Trails” in the search box for detailed information by tax topic.
Enter “Pub 17” in the search box to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, 2016-2017 tax changes, and thousands of interactive links to help you find answers to your questions.
Call TeleTax at 1-800-829-4477 for recorded information on a variety of tax topics.
Go to IRS.gov and click on the Help & Resources tab for more information.
The Time-Space Percentage is the ratio a provider will use to determine the business portion of shared expenses, including business use of home expenses as well as all other expenses related to items, assets and/or services with both a personal and a business component, i.e. office expenses, rent of business property, property maintenance, supplies, …
Determining Business Percentage
The business percentage consists of two elements: the space and time percentage discussed in detail below. The two percentages are multiplied by each other to get the business percentage.
Note: Part I of Form 8829, Expenses for Business Use of Your Home, walks the provider through the actual computation. Form 8829 instructions provide detailed computation directions for the cases where the provider’s business usage consists of a combination of exclusively-used and regularly-used rooms.
Space percentage consists of the area regularly used for business (the numerator) divided by the area of the complete home (the denominator).
In determining whether a space in the home passes the “regular use” test in computing business use of the home, Revenue Ruling 92-3 outlines the following:
“If a room is available for daycare use throughout each business day and is regularly used as part of A’s routine provision of daycare (including a bathroom, an eating area for meals or a bedroom used for naps), the square footage of that room will be considered as used for daycare throughout each business day. A daycare provider is not required to keep records of the specific hours of usage of such a room during business hours. Also, the occasional non-use of such a room for a business day will not disqualify the room from being considered regularly used. However, the occasional use of a room that is ordinarily not available as part of the routine provision of daycare (e.g., a bedroom ordinarily restricted from daycare use but used occasionally for naps) will not be considered as used for daycare throughout each business day.”
If the regularly used test is met, then that area is included in the numerator. For example, the taxpayer has three children in his/her care and three bedrooms used for naps. The provider explains that the children are put down for naps separately since they sleep better. While the provider could put all three children down for naps in the same room, the examiner should not limit the deduction to the use of one bedroom.
A common error is to include only one floor in the total square footage. Square footage of all floors, including the basement must be added to the total square footage. If a provider is using a garage in the business, he/she must be sure that the square footage of the garage is added to the denominator (total home space) as well as the numerator (business usage space).
Time percentage is the total number of hours the facility was used for the child care business during the year (the numerator) divided by the total hours in the year (8,760 hours).
A childcare provider should record how the total hours that the home was used, were computed. Hours spent cooking, cleaning, and preparing activities for the childcare business could be included in the calculation of the numerator of the time percentage if the tests for deduction are otherwise met, i.e. are ordinary and necessary expenses.
The hours for business vary from provider to provider. For example, because of the type of service provided and/or ages of the children, some providers might spend more time than others preparing activities for children and vice versa. In addition, some preparation work might be done on the weekends. Record keeping time can also be included.
It is recommended that a provider keep a detailed log of activities for a significant part of the year. This detailed record keeping of the time spent and tasks performed is essential to providing the details needed should the provider be audited.
A provider must calculate the time-space percentage every year.
Resources and Links:
Self-employment income is derived from carrying on a “trade or business” as a sole proprietor, an independent contractor or some forms of partnerships.
Self-employed individuals generally must pay self-employment tax as well as income tax. A childcare provider must pay self-employment tax and file Schedule SE (Form 1040) if the net earnings from self-employment were $400 or more. Self-employment tax is Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).
Social security tax is a flat 12.4% of all compensation income, up to a maximum compensation amount of $118,500.
Medicare tax is a flat tax at a rate of 2.9% on all compensation income.
A provider will use form 1040 SE to determine the self-employment tax, but first, calculate the net profit/loss via Schedule C. He/she will report self-employment tax on Form 1040 line 57.
A provider can deduct half of the self-employment tax when figuring gross adjusted income, Form 1040 line 27. This will reduce the amount of income tax paid. Because the provider is the employer, he/she is entitled to deduct half of the FICA taxes that he/she pays as an employer, just as any other employer would.
Resources and Links:
As a self-employed individual, a childcare provider does not have an employer withholding social security or Medicare taxes. To avoid penalties for not paying taxes throughout the year, the provider may need to file a quarterly federal and state estimated tax form. If married the provider spouse can increase payroll withholding taxes to cover the provider.
Who Must Pay Estimated Tax
If a provider is filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, then he/she generally has to make estimated tax payments if $1,000 or more in tax is owed when the return is filed.
Calculating Estimated Tax
Form 1040-ES, Estimated Tax for Individuals (PDF), is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. A provider will need the prior year’s annual tax return in order to fill out Form 1040-ES since it will provide a useful basis for calculating expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If a provider finds that earlier quarterly payments were too low or too high, he/she can refer again to the 1040-ES worksheet and refigure his/her payment for the next quarter. In going through this process, the provider will want to avoid later penalties for underpayment.
Payment Due Dates
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If a payment is mailed, the date of the U.S. postmark is considered the date of payment.
How To Pay Estimated Tax
There are several ways to pay estimated tax:
- Credit an overpayment on the 2015 return to the 2016 estimated tax
- Pay by direct transfer from a bank account (go to www.irs.gov/directpay)
- Pay by debit or credit card using a pay-by-phone system
- Pay by debit or credit card using the Internet
- Send in payment (check or money order) with a payment voucher from Form 1040-ES.
For more details see IRS Pub. 505 Ch. 02 – Estimated Taxes.
If a provider does not pay enough tax by the due date of each of the payment periods, he/she may be charged a penalty even if he/she is due a refund when filing an income tax return.
Resources and Links: