Daycare Tax Tips


Child Care Business Licenses

Which ones do you need?

Family child care providers are no strangers to licensing issues and it can be daunting for those starting out in business. The array of licensing and registrations required can be quite confusing. Let's review and clear up any misconceptions about social service licensing, local business licenses, fictitious business names and IRS tax id numbers.

Note: The information below applies to providers residing in the State of California, though procedures are probably similar in most other states. The last section on IRS Business ID Numbers applies to all US residents.

Social Service Licensing

Before opening the door to care for children, most family child care providers must first register with the California Department of Social Services. This is your primary and most important license.

In California, it is my understanding that you do not need a license if you care for the children of only one family or if you care for children who are related to you. This means that you could potentially care for the children of one family, plus any number of related children, without a license.

Note that your taxable income will be higher if you are required to have a license but don't get one. This is because unlicensed providers are not allowed to treat a percentage of their home expenses as a business expense for tax purposes.

City Business Licenses

Most California cities and towns require business owners to obtain a business license. You will generally have to pay an annual fee or an annual tax or both. Many localities calculate their business tax based on "gross receipts," which means as a percentage of total business income (from parents, etc) before subtracting any expenses. In addition, home businesses must often obtain a special home occupation permit and pay associated fees.

New providers--contact your city or county (if you live in an unincorporated area) and find out if you are required to have a business license. If you've been in business for a while and never inquired about a business license, do it now. Many California cities are getting residents' income tax information from the Franchise Tax Board and cross-checking to find unlicensed businesses. An on-going business found in this manner is likely to be billed for several years back taxes and fees.

Some cities have special rules for family child case businesses. My hometown of Fremont does not require owners of small day care businesses (six kids or less) to get a business license, but they do require it for large day cares.

Here is a list of California cities currently receiving information from the Franchise Tax Board regarding sole proprietor business owners:

https://www.ftb.ca.gov/businesses/City_Business_Tax_Program/Participating_Cities_Public.pdf

Fictitious Business Names

Many day care providers simply operate their business, and open a business bank account, under their own name. Some use a made up name, such as "Anna's Loving Care." This is called a "fictitious business name" and it must be registered with the county. Registration allows you to open a bank account and accept check payments under your business name.

Contact your County Clerk/Recorder's Office to file a Fictitious Business Name Statement (example form is from Alameda County). If you search online, you will find a number of businesses who will take care of this paperwork for a fee. The process is actually quite simple. You needn't pay for help unless you want to.

First search county records to be sure that no one else is using the name you have chosen. Next submit your county forms (several copies) with the filing fee. You should receive back three copies with the official stamp of the county clerk. One is for your permanent records. Another is for your bank and will be needed if you wish to open a bank account using your business name. A third is for a newspaper of general circulation in your area.

Your Fictitious Business Name Statement must be published within 30 days. I recommend that you sit back and wait for the solicitations that will come in the mail from newspapers in your county who publish legal notices. (They will get your address from the county clerk.) Choose the cheapest deal. You needn't publish in the biggest paper in town.

The newspaper should handle everything for you. They publish your notice four times and then send the affidavit of publication to the county clerk. When all is said and done, you will receive a Proof of Publication back from the county with their official stamp.

Fictitious business names generally last for a certain period (five years in Alameda County) and must be renewed before the period is up.

IRS Business ID Numbers

You do not need to register with or obtain any kind of business license from the Internal Revenue Service. Some folks find this surprising.

Most family child care providers are sole proprietors, meaning you own and run the business and have not set up any kind of separate entity, such as a corporation**. Sole proprietors are not required to get a tax id number from the IRS, because you file your tax return under your social security number. If you have employees, however, you have to get an Employer Identification Number (EIN).

I recommend that all child care providers go to the IRS website and apply for an EIN, even if you don't have employees. Give your EIN to vendors (meaning folks who pay you, like the food program) and especially to parents. Parents will need a tax id number to claim the Dependent Care Credit on their tax return. It is best to get an EIN and protect the privacy of your social security number.

For further information and assistance in obtaining an Employer Identification Number, please read my "Get an EIN" Tax Tips Post.

**Note: I caution any provider thinking of setting up a corporation, partnership, or LLC not to rush into such a decision. Research the issue thoroughly and be sure to consult with an attorney and your tax advisor. Make sure you are clear about the benefits and limitations of functioning as your chosen business entity, as well as the ongoing duties and costs. Read my "To Incorporate or Not" Tax Tips Post. Functioning as a sole proprietorship is usually the most straightforward, easiest, and cheapest way to structure a family child care business.


Last updated on 5 December 2012

Posted on 2008-11-11 01:08:12

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