September 17, 2007

Employees and Payroll
Let's start with Workers' Compensation

This issue of Day Care Tax News focuses on employee issues and the first subject I want to tackle is workers' compensation insurance. Do you have one or more employees? If so, do you have this essential insurance?

Workers' comp is not a subject I have discussed with my day care clients, so I will be very interested to get your feedback. Until very recently, as a small employer myself, I found it nearly impossible to get workers' comp coverage. Thus, it will not surprise me if many of you lack coverage.

As stated in the Frequently Asked Questions on the website of the California Division of Workers' Compensation, California law requires employers to have workers' compensation insurance if they have even one employee. The same is true for most other states. What's truly scary are the fines imposed on employers without coverage.

I'm almost sorry to give you the details, but keep reading. It's better to hear this in advance of a problem. The good news is that you probably can find reasonably priced coverage if you need it.

In California, failing to have workers' compensation coverage is a misdemeanor criminal offense punishable by a fine of up to $10,000 or imprisonment of up to one year, or both. The state can also issue penalties well above that amount. Large penalties also apply in many other states.

If an employee gets hurt or contracts a disease on the job, you are responsible for paying all bills related to the injury or illness. These costs will not be covered by the employee's own health insurance. The employee can file a civil action against you in addition to filing a workers' compensation claim.

Oof! This is nothing to sneeze at! Workplace injuries can and do happen. I breathed a big sigh of relief when I obtained a worker's compensation policy to cover my part-time assistant.

I was able to obtain coverage through State Farm, my homeowners' insurance carrier and was pleasantly surprised to pay an annual premium of only $250. I was afraid I would have to pay quite a bit more. Most companies have a minimum premium, even for small employers.

If you are an employer with coverage, please contact me and let me know what company you're with, how many employees you have and (if you don't mind) the amount of your annual premium. This information could help other providers and I will write about it in a future mailing if I receive some useful information.

If you are an employer without coverage, I hope you can see the importance of getting some, even if you have only one part-time employee like me. You might start by talking to your homeowners' insurance agent. Also check with your payroll company, if you use one. Many offer workers' compensation solutions to their customers.

You should have an EIN
Protect the privacy of your social security number

Day care providers, with or without employees, have an important reason to obtain an Employer Identification Number: IDENTITY THEFT PREVENTION. Parents will often request your tax id number for the purpose of claiming the federal Dependent Care Credit on their income tax return. It is much safer to give them an EIN, rather than revealing your social security number.

You can get an EIN quickly and easily via the IRS website. I give step by step instructions in the following Tax Tips blog post on my website:

How to Apply for an Employer ID Number

It's really quite simple.

Once you have your EIN, give it out to parents and protect the privacy of your social security number. It's okay to give out your new identification number to some parents even though you may have previously given out your social security number to other parents.

Should you hire your spouse?
Deduct your family's medical costs as a business expense

From a tax perspective, I do not normally recommend that day care providers treat their spouses as employees. There is generally no tax savings, because the spouse's wages are taxable on the couple's joint income tax return.

Here are two situations where hiring your spouse can be a good idea, however:

1) Your spouse works a large number of hours for the business. It may, in fact, be your spouse's only employment.

2) You are paying out-of-pocket for health insurance and other medical expenses for you and your family.

In the first scenario, your spouse is really a partner in your business. Setting up a true partnership is a messy situation for a family child care provider. A better option is hiring and paying wages to your spouse. This way he will have his own social security record and be eligible for benefits when he retires.

The second scenario offers you the opportunity to deduct your family's health insurance premiums and other out-of-pocket medical expenses as a business expense by setting up a Health Reimbursement Arrangement (HRA) for your employee spouse. You are even able to deduct your own insurance and medical costs directly on your business Schedule C. This is not normally possible for a sole proprietor business owner to do, but it can pay off handsomely by decreasing both your income tax and your self-employment tax.

Scenario #2 only works if your spouse performs regular, bona fide duties for your business. (Preferably at least some of his hours involve working directly with the children.) It is also essential to keep detailed records of hours worked and duties performed.

If you set up an HRA for your spouse, you must offer a similar plan to any other employees you hire for your business. However, you can exclude employees from this benefit if they have worked for you less than three years, if they work less than 35 hours a week, or if they are under age 25.

Seek professional help to set up an HSA. Further information can be found in the Family Child Care Record-Keeping Guide from Redleaf Press.

Record Keeping and Tax Workshops
Schedule a date for your organization now

This fall, I am available to conduct record keeping and tax workshops for California day care provider organizations. The workshops will build on Day Care Record Keeping 101 (see below) and provide a wealth of additional information and suggestions. My primary goal will be to address the concerns of each particular audience.

Please contact me if your California organization would like to schedule a date in November, December or January. Small groups are fine. There is no cost to you.

Day Care Record Keeping 101
A quick reference guide

My colorful, two-page, quick reference guide to day care record keeping is now available. The record keeping tips will prepare you for tax time, let you pay the lowest tax and help you avoid audit problems.

Day Care Record Keeping 101 should be extremely useful to new providers and should provide helpful reminders to those of you who have been in business for a while. I welcome your feedback.

Click here to view Day Care Record Keeping 101. Expect to wait a minute or more for the PDF document to download. If you would like me to send you a two-sided hard copy, simply contact me with your name and mailing address.

Day Care Associations, Resource and Referral Services and others are welcome to request larger quantities for distribution.

Independent Contractor?
Why your workers are almost certainly employees

Persons you pay to come into your home and work in your day care business are almost always your employees. It doesn't matter how few hours they work or whether you hire them for one day, one week or the whole year.

The only circumstance where a person helping you care for children is not your employee is if this person is in the business of providing substitute care for a number of providers. You might also have an independent contractor if you ever engage the services of a storyteller, tutor, puppeteer, or other specialized businessperson.

Persons described in the previous paragraph may be treated as independent contractors. Be sure to obtain a federal tax id number. (Give the person a Form W-9 to fill out.) You must have written statements, bills and/or invoices from the service provider and should use a contract with substitute care providers. Give the person a Form 1099-MISC by January 31, if you pay her $600 or more during the year. (Failing to provide a 1099 means that you will automatically lose the deduction if audited.)

Talk to your tax advisor if you are at all unsure whether a person can be treated as an independent contractor. These situations are quite limited.

Thus, I repeat:
Your day care workers are almost always your employees.

Payroll Tax Guide
You can do it yourself but do you want to?

Payroll tax returns are not hard to prepare, but you should have a head for numbers and maintain good wage records.

Small California employers file state payroll tax returns quarterly. Federal returns are also normally filed quarterly, but very small employers are often asked to file annually.

Check out my Payroll Tax Guide to see what's involved in handling your own payroll tax reporting. You'll be able to get an idea whether you want to tackle the work yourself or get a payroll tax service to do it for you.

Even if you feel you could prepare the forms yourself, you may prefer to use a service for the convenience. Forms are due frequently and there are significant penalties for late filing and paying of payroll taxes.

Meal Allowance Rates
Rates for 2007 & 2008

Family Child Care Providers may deduct their actual grocery cost or use the standard meal rates shown below to calculate their deduction. Records must be kept of attendance and meals served.

Standard Meal Allowance Rates for 2007
(in the continental U.S.)

$1.06 for each breakfast
$1.97 for each lunch or dinner
$0.58 for each snack (up to 3 per day)

Standard Meal Allowance Rates for 2008
(in the continental U.S.)

$1.11 for each breakfast
$2.06 for each lunch or dinner
$0.61 for each snack (up to 3 per day)