| I am an Enrolled Agent in private practice since 1995. My first job out of college was as a software engineer, followed by some years when I stayed home with my two sons. At that time I used the services of a wonderful child care provider and when I started working in the tax field, she put me in touch with her local child care association. Eventually, working with day care providers became the focus of my tax practice. I provide income tax and payroll services for clients from all over California out of my home office in the San Francisco Bay Area city of Fremont.
Enrolled Agent status is the highest credential awarded by the Internal Revenue Service, following a rigorous testing process. EAs prepare tax returns and also represent taxpayers. If you receive a notice or are under audit by the IRS, an Enrolled Agent can work directly with IRS personnel on your behalf to achieve the best possible outcome.
Child care providers need specialized care. Most tax professionals (even experienced ones) are unfamiliar with the nuances of day care taxes. I see many tax returns with both large and small errors that cause the provider to pay more tax than necessary or leave the provider in a risky position in case of an audit. Educating yourself is a must, as is finding the right tax professional.
The rest of this letter contains pointers that will get you off on the right foot with your record keeping and be ready for tax time.
As a new child care provider, you will find there is much to learn about managing your business. My first recommendation is to waste no time becoming acquainted with Tom Copeland. Tom is the national authority on the business of family child care with over 30 years experience. He has published many helpful family child care publications. All providers should have a copy of his Family Child Care Record-Keeping Guide. Subscribe to Tom's blog--his regular posts contain very valuable information--and check out Tom's training schedule. He offers webinars that you can attend via your home computer, though if you are able to attend an in-person workshop, you won't be disappointed!
From a tax perspective, your main focus should be getting a good record keeping system into place. Income tax will apply only to your business profit, which means income minus allowable expenses (including allowable home expenses). Therefore, carefully saving all receipts and recording all expenses is important. Even if you haven't started caring for children yet, keep track of the costs involved in getting your business started. Besides tracking expenses, you need a system to keep track of your work time. This means time spent in your home either caring for children or doing other business-related activities.
New child care providers may want to do a household inventory before the end of the year. This will allow you to take a tax deduction based on the value of your existing household furnishings and other personal property owned at the time you started your business. Using the Tom Copeland's Inventory-Keeper Booklet will help you do a thorough inventory, but you can document your household items any way you choose. The inventory should be done in the first year of business, so act now to take advantage of this tax deduction. It is possible for established providers to catch up on missed household inventory depreciation, but the tax preparation cost is much higher and you cannot include any items that you no longer own.
Most family child care providers are sole proprietors, meaning you are the self-employed sole owner of the business. For income tax purposes, I work with sole proprietors only, no corporations or partnerships. I have a few clients who have set up their business as a single-member Limited Liability Company (LLC) and, therefore, still file their tax return as a sole proprietor. Please review your options carefully and seek legal advice before setting up any type of business entity. Several of my clients have dissolved their LLC status because it did not seem worth the annual cost.
Business owners must generally make estimated tax payments to cover their tax liability or risk ending up with a large balance due at tax time and potentially also an "underpayment penalty." The government requires taxpayers to pay-as-you-go and not wait until the end of the year or until April 15 to pay income tax and self-employment tax. (See my Family Child Care Tax Return Overview handout for more information regarding the type of taxes that apply to your income.) If you are married and file jointly with your spouse, the income tax withholding from your spouse's wages might be enough to cover your taxes, too. This is not always the case, however.
Good luck with your business. There are a lot of things to learn about in the beginning, but it gets easier. Find and join a local family child care association so you can network and learn from experienced providers. Get the resources of a large national organization behind you by joining the National Association for Family Child Care.
Please "Like" my Facebook Page to receive further communications from me on topics of interest to family child care providers.
Alison T. Jacks, E.A.
P.S. Here is some additional information which you may find helpful:
Alison's Frequently Asked Questions
Payroll Tax Guide for Daycare Providers
Child Care Tax Return Checklist, a list of the information needed to prepare a family child care tax return.
Child Care Business Licenses
Time/Space Percentage Calculation
Day Care Record Keeping 101, a quick reference guide for family child care providers.
Sharon Coleman's "The Professional Provider", an informative book with a wealth of information for new child care providers.
How to Find a Tax Preparer
Family Child Care Tax Return Overview
Family Child Care Tax Deductions
Envelope Record-Keeping Method for Child Care Providers
Handouts in Spanish:
Spanish Family Child Care Tax Return Overview
Spanish Family Child Care Tax Deductions
Spanish Time/Space Percentage Calculation
And don't forget the wealth of information published by Tom Copeland and mentioned at the top of this article.
Last updated: 14 May 2013