Daycare Tax Tips

How Much Will an Employee Cost You?

Get a handle on wages + taxes + fees + insurance

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How much will it cost to hire a child care assistant? You can pretty easily estimate the amount of wages, but what about payroll taxes, insurance, etc.?

This article looks at the cost for a California family child care provider with one full-time employee. Her total cost for one year includes wages of $20,800, employer taxes of $1,878.20 (about 9% of wages), a workers' compensation insurance premium of $1,000-$2,000, and payroll service costs of $624-$1,600. (Our FCC Payroll Service is a low cost option for California providers.)

All together, this child care provider's total annual cost for a full time assistant comes to between $24,302 and $26,278.

For a provider with two part-time helpers, another posting on this site shows an annual cost of between $15,600 and $17,500.

Many day care providers are under the impression that it's okay to treat assistants as independent contractors and give them a 1099-MISC at the end of the year. Some tax preparers may even encourage this practice, but this is bad advice. Typical daycare business helpers must be treated as employees and provided with a Form W-2 at the end of the year, even those working minimal hours. All of the costs associated with hiring a worker are 100% tax deductible as a business expense.

For detailed information about payroll tax forms and rates, refer to our Payroll Tax Guide.

The examples below use 2015 tax rates and apply to California employers, but they should NOT be used to calculate payroll taxes in a real situation.

Payroll rates and procedures are subject to change at any time.

Some payroll taxes are paid by your child care employee (withheld from their wages) and some are paid by you as the employer.

First the EMPLOYEE Taxes

Here's an example of a biweekly paycheck for 80 hours at $10/hour:

$800.00 Total wages (80 hours x $10)
- $70.00 Federal income tax withholding (will vary)
- $49.60 Social security employee contribution (6.2%)
- $11.60 Medicare employee contribution (1.45%)
- $7.50 California income tax withholding (will vary)
- $7.20 California state disability insurance (SDI) (0.9%)
$654.10 Net paycheck amount

In this example, total employee taxes per paycheck equal $145.90. These taxes come out of the employee's pocket, not yours. As the employer, however, you must turn over employee taxes withheld to the authorities when required, as explained below.

Here are the EMPLOYER Taxes

$49.60 Social security employer contribution (6.2%)
$11.60 Medicare employer contribution (1.45%)
$4.80 Federal unemployment insurance** (0.6%)
$27.20 California unemployment insurance** (will vary annually; new employers pay 3.4%)
$0.80 California employer training tax** (0.1%)
$94.00 Total employer taxes per paycheck

**Note that unemployment insurance (Federal and California) and the California employer training tax apply only to the first $7,000 of wages for each employee each calendar year. Once an employee has reaches $7,000 in wages for the year, employer taxes drop to $61.20 per paycheck.

Another thing to be aware of is FUTA Credit Reduction. Since 2011, California employers have had to pay about two times the normal amount of Federal unemployment insurance (FUTA).

Paying Payroll Taxes

Every payday, you will give your employee a paycheck equal to the net paycheck amount. This means total wages minus withheld taxes, which is $654.10 on our sample paystub.

The employee's withheld taxes and your employer taxes are paid to the Internal Revenue Service (IRS) or the California Employment Development Department (EDD) either monthly or quarterly. Most child care employers run a small payroll and qualify to pay at the end of each three-month calendar quarter. (See our Payroll Tax Guide for further information.)

Quarterly Totals

According to our sample biweekly paycheck, if there are six paydays in the three-month quarterly period, the wage and tax cost will be:

$3,924.60 Total net paychecks
$875.40 Total employee taxes withheld
$564.00 Total employer-paid taxes
$5,364.00 Total payroll cost for the quarter

You will have to turn over payroll taxes (both employer taxes and employee withheld taxes) of $1439.40 to the federal and state authorities at the end of the quarter. The taxes are due by the last day of the month following the end of each quarter. For example, payroll taxes for the first quarter (which includes of January, February, and March) are due by April 30.

Annual 1099-MISC Comparison

Converting the helper in this example (paid $800 every two weeks) from 1099-MISC independent contractor treatment to employee treatment will cost the child care provider $1,878.20 in employer taxes over the entire year. This includes $1,591.20 for social security and Medicare taxes plus $287 for unemployment insurance and the California employer training tax.

As a percentage, this is about 9% of the employee's wages. We can't count on the percentage being the same for every employee situation, so let's assume 10% overhead for payroll taxes.

Other Payroll Costs

Workers' Compensation Insurance: All California employers must have this insurance. It pays the medical costs when an employee is injured at work. The premium may cost somewhere around $1,000 to $2,000 per year.

Payroll Service: You will need to find a payroll service, unless you decide to handle the paperwork yourself. It can be done by hand, but to avoid errors, I recommend using some kind of software. Child care providers already spend a lot of time on record keeping and may not want to deal with calculating paychecks, preparing payroll tax returns, and making the tax payments...especially since the penalties can be high for late payments and tax returns.

Compare the rates and services offered by various payroll services. From what I hear, the large companies (such as Paychex and ADP) are charging around $65 every payday for full service payroll. This will amount to about $1,500 per year, because California requires day care employees to be paid at least twice per month. There are some lower cost options out there, including our FCC Payroll Service.

Note that California employees are entitled to paid sick leave, up to at least 24 hours per year, which may increase your payroll costs somewhat.

Last updated 4 August 2015

Posted on 2010-07-27 22:15:26