If you are a new home daycare provider, chances are you are paying more tax than required!
Tax time can wreak havoc on your profits if not done right. There are a lot of rules and regulations to keep track of, and it can be easy to make mistakes.
But don’t worry, I can help!
Initial preparation for home daycare taxes involves:
- Keeping detailed records of daycare expenses.
- Learning your state’s tax rules.
- Listing potential tax credits and deductions.
- Sorting all important bills and receipts.
This blog is your compass through the maze of tax challenges. I have included all the details and supporting tools for home daycare taxes to decrease your workload and increase your savings.
Tax Preparation Checklist for Home Childcare Providers
The tax requirements for licensed in-home daycare and unlicensed daycare can vary depending on the state.
But in the USA, the IRS considers all home daycare providers, whether licensed or not, to be self-employed and, therefore, are subject to self-employment tax.
For taxes, you need to start with a good record keeping of all your income and expenses, followed by a list of deductions and credits you can claim and then file taxes on time and correctly.
Some general tax requirements for all in-home childcare providers include:
1. Receipts & Invoices
- Collect all receipts, invoices, and canceled checks for business expenses throughout the year.
- Keep a detailed mileage log for business-related travel.
- Maintain a record of all income received, including payments from parents, subsidies, or grants.
- Organize your records by category, such as supplies, utilities, meals, and travel.
2. Calculating Deductions
- Determine the percentage of your home used for daycare purposes.
- Calculate the deductible portion of your home expenses, including mortgage interest, property taxes, utilities, insurance, and depreciation.
- Deduct other allowable expenses, such as supplies, meals, toys, educational materials, and professional development costs.
- Track vehicle expenses using the standard mileage rate or actual expenses method.
3. Claiming Credits
- If eligible, claim the Child and Dependent Care Credit for expenses incurred while you work.
- Consider claiming the Earned Income Tax Credit if your income falls below a certain threshold.
- Explore other potential tax credits, such as the Small Business Health Care Tax Credit or the Retirement Savings Contributions Credit.
4. Tax Identification Number (TIN)
A Tax Identification Number (TIN) is crucial for tax reporting. You can obtain an Employer Identification Number (EIN) from the IRS if you have employees or operate as a corporation or partnership. If you’re a sole proprietor, you can use your Social Security Number. The TIN ensures proper tax reporting and compliance.
5. Filing Tax Forms
- Complete Form 1040 Schedule C to report income and expenses from your home daycare business.
- Fill out Form 8829 to calculate deductions for business use of your home.
- Use Schedule SE to calculate self-employment tax on your home daycare income.
- If applicable, file Form 2441 to claim the Child and Dependent Care Credit.
Expense Tracking for Home Daycare Taxes
When it comes to dealing with taxes for your home daycare, there’s one big, important thing to remember: keeping proper track of your spending and calculating them quarterly. It’s not just about getting ready for tax time; it’s also a smart way to save money and make sure you don’t end up with any surprise tax fines.
Now, let’s talk about some easy ways to keep tabs on all your home daycare expenses.
- The Notebook Approach: Grab a simple notebook and designate it as your expense log. Whenever you spend money related to your daycare, jot down the date, what you bought, and how much it cost. It’s basic, but it gets the job done.
- Digital Spreadsheets: If you’re more tech-savvy, create a digital spreadsheet using software like Microsoft Excel or Google Sheets. Set up columns for date, expense description, and amount. You can even use free templates available online for added convenience.
|Week/Month||Date||Amount Paid||Check #||Notes|
- Expense-Tracking Apps: Numerous smartphone apps are designed for expense tracking. They often come with user-friendly interfaces, making it easy to input expenses on the go. Some apps even allow you to take photos of your receipts for safekeeping.
- Envelopes or Folders: For those who prefer a tactile approach, use envelopes or folders labeled with categories like “Supplies,” “Food,” “Utilities,” and so on. Whenever you have a receipt, simply file it in the corresponding envelope or folder.
- Online Accounting Software: Consider using online accounting software like QuickBooks or FreshBooks, which are designed to manage finances for small businesses. They offer expense tracking features and can help you stay organized.
- Bank Statements: You can also rely on your bank statements to track business expenses. Be sure to use a separate business bank account and credit card for your daycare to make this process smoother.
The most important thing is to choose a method that you will be consistent with and that will help you track your expenses accurately.
Complete Tax Deduction List for Home Daycare Providers
Now that you are clear about tax requirements for your in-home daycare, let’s move toward tax return you can claim to reduce your overall taxable income.
As a home-based daycare provider, you may be able to deduct several expenses from your taxes depending on your state’s law.
Some of the most common deductions include:
1. Administrative Cost
Administrative costs are expenses that are necessary to run your daycare business but are not directly related to the care of children. Some examples of administrative costs that are deductible include:
- Business Software
- Business Insurance
- Accounting and legal fees
- Advertising and marketing expenses
- Travel expenses related to your business
The cost of advertising your daycare business is also deductible. Such as the cost of printing and distributing flyers, creating and maintaining a website, running social media ads and placing ads in local newspapers or magazines.
3. Transportation Costs
Suppose you use your personal vehicle for business purposes, such as to run errands for your daycare business. To transport children to and from field trips, you can deduct the mileage you drive.
To do this, you will need to keep track of your mileage(mileage covers repair and gas) and business travel expenses, that could include:
- Mileage expenses for driving to and from the grocery store to purchase supplies for your daycare business
- Mileage expenses for driving children to and from field trips
- Parking fees
4. Development Program
development programs either for oneself or kids, both are deductible. For instance, taking online courses, purchasing books and other resources related to childcare or arranging musical classes or field trips for kids.
5. Meal and Snacks
The cost of meals and snacks provided to children in your care may be deductible from your taxes, but only if you do not receive a grant or other form of assistance to cover these costs.
To deduct meal and snack expenses, you must keep detailed records of all of your expenses, including the date, the amount spent, and the purpose of the expense. You should also keep receipts for all of your purchases.
When filing your taxes, you can deduct meal and snack expenses on Schedule C of Form 1040. You will need to list the total amount of your meal and snack expenses on line 25a. You will also need to list the amount of any grants or other assistance you received on line 25b.
Examples of meal and snack expenses that are deductible:
- The cost of purchasing food for children in your care
- The cost of preparing meals and snacks for children in your care
- The cost of disposable utensils, plates, and cups
- The cost of cleaning supplies for your kitchen and dining area
It is important to note that you cannot deduct the cost of food that you eat yourself, even if you are eating with the children in your care. You can also not deduct the cost of food that you provide to your own children.
7. Retirement Plan
As a home daycare provider, consider setting up a retirement plan, such as a Simplified Employee Pension (SEP) IRA or a solo 401(k). These plans offer tax benefits and enable you to save for retirement while reducing your taxable income.
Child and Dependent Care Credit
Home childcare providers are also eligible for the child and dependent care credit, which can help offset the cost of childcare. The credit is equal to 20% of the lesser of:
- The amount of money spent on childcare, up to a maximum of $8,000 for one qualifying child or $16,000 for two or more qualifying children.
- The taxpayer’s earned income.
To qualify for the credit, you must have paid for childcare for a qualifying child under the age of 13.
For your old parents To be considered a dependent, your parent must meet the following requirements:
- They must have lived with you for more than half of the year.
- They must be a U.S. citizen or resident.
- Their gross income must have been less than $4,400 in 2022.
- You must have provided more than half of their support.
Home-Office Space Deduction
To qualify for a home office deduction, you must meet certain requirements, such as using the certain space of your home exclusively for your daycare business and using it on a regular basis.
To claim the home office deduction, you will need to complete Form 8829 (Expenses for Business Use of Your Home). You can find this form on the IRS website.
To calculate home office deduction, you can use 2 methods:
- Simplified method
- Regular method
To use the simplified method, you simply multiply the square footage of your home office by a set rate per square foot. The rate for 2023 is $5 per square foot. The maximum deduction is $1,500, so even if your home office is larger than 300 square feet, you will not be able to deduct more than $1,500.
To use the regular method, you must calculate the percentage of your home that is used for business purposes and then multiply that percentage by your total home expenses. You can then deduct that amount from your taxes.
To calculate the percentage of your home that is used for business purposes, you can use the following formula:
(Square footage of home office) / (Total square footage of home) = Percentage of home used for business
For example, if your home office is 100 square feet and your total home square footage is 1,000 square feet, then the percentage of your home that is used for business is 10%.
Once you have calculated the percentage of your home that is used for business, you can then multiply that percentage by your total home expenses to determine the amount of your home-business deduction.
For example, if the percentage of your home that is used for business is 10% and your total home expenses are $10,000, then you can deduct $1,000 from your taxes ($10,000 x 10% = $1,000).
Which method should you use? The best way to decide which method to use is to compare the two methods and see which one will result in a larger deduction for you.
It is also important to note that if you use the regular method, you will need to keep detailed records of your home expenses. This can be a time-consuming task, but it is necessary if you want to maximize your deduction.
Home office expenses that are deductible as per IRS :
- Phone and internet service
- Computer equipment
- A portion of your mortgage interest, property taxes, and homeowners insurance.
- Utilities (such as gas, electricity, and water).
- Repairs and maintenance.
- Depreciation on your home and business assets.
- Daycare supplies and equipment.
- Salaries and wages paid to employees.
- Food and snacks are provided to children in your care.
- Insurance for your business.
The process to File Taxes as a Home Childcare Provider
Simple general steps include:
- Gather all of your income and expense documentation.
- Choose a tax filing method.
- File your taxes.
Home daycare providers use a simple tax return method. Simple tax returns are filed using IRS Form 1040 only, without having to attach any forms or schedules.
But if your income minus expenses from home daycare is more than $400, you must file Schedule SE. This will determine your taxes for childcare.
Here’s a breakdown of the essential tax forms and when they’re due:
Schedule C (Form 1040)
Schedule C is the go-to form for reporting your daycare income and expenses. It’s essentially your profit and loss statement for your business. You’ll list your income, including what you earn from daycare services, as well as your expenses, such as supplies, meals, and a portion of your home-related expenses.
Deadline: Schedule C is typically due on April 15th, but if that date falls on a weekend or holiday, you’ll have until the next business day.
Estimated Quarterly Taxes
As a self-employed daycare provider, you’re responsible for paying estimated quarterly taxes. Use Form 1040-ES to calculate and pay these taxes. It helps you avoid a large tax bill at the end of the year.
Deadlines: These payments are due on April 15, June 15, September 15, and January 15 of the following year. Be sure to mark these dates on your calendar!
Keep an eye on the various IRS deadlines throughout the year. These include deadlines for filing W-2 and W-3 forms for any employees you have, as well as other informational forms.
Deadline: Deadlines for informational forms can vary, so it’s crucial to check the IRS website or consult your tax professional for specific dates.
Common Issues in Tax Returns as Per IRS
The IRS often finds that childcare providers underreport their income and overstate expenses. This is because child care providers often receive cash payments and do not keep good records.
The most common issues that the IRS finds with childcare providers’ returns include the following:
- Gross receipts: The IRS may find that the childcare provider has not reported all of the income they received. This could be because they received cash payments that they did not report, or because they did not report all of the children they were caring for.
- Food reimbursement: The IRS may find that the childcare provider has claimed more food reimbursement than they are entitled to. This could be because they are including personal food expenses in their reimbursement claims, or because they are claiming reimbursement for food that they did not actually provide to the children.
- Food expense: The IRS may find that the childcare provider has claimed more food expenses than they actually incurred. This could be because they are including personal food expenses in their food expense claims, or because they are claiming expenses for food that they did not actually provide to the children.
- Business use of home: The IRS may find that the childcare provider has claimed too much of their home as a business expense. This could be because they are including personal living space in their business use calculation, or because they are claiming expenses for things that are not actually related to their business.
- Unusually large expenses: The IRS may find that the childcare provider has claimed unusually large expenses. This could be a sign that the provider is trying to hide income or overstate expenses.
- Supplies and miscellaneous expenses: The IRS may find that the child care provider has claimed too many supplies and miscellaneous expenses. This could be because they are including personal expenses in their claims, or because they are not keeping good records of their expenses.
If the IRS finds that a childcare provider has underreported their income or overstated their expenses, they may adjust the return and assess additional taxes. It is important for child care providers to keep good records and report their income and expenses accurately to avoid problems with the IRS.
Want to dive deeper into IRS tax guidelines? Check out IRS Tax Guide for Child Care Providers for more details.
Outsourcing CPA/Tax Advisor to File Taxes
Tax deductions and returns can vary between LLC businesses and self-proprietors. If you’re an LLC-based home daycare provider, investing in a skilled CPA (Certified Public Accountant) is your best bet for navigating the complexities.
However, if you prefer a DIY approach, staying informed via the IRS or your state’s official website can provide the necessary assistance and knowledge for handling your taxes effectively.
5 Tips for Preparing Taxes as a Home Childcare Provider
- Track income and expenses daily.
Use a planner or calendar to track all income and expenses, including the amount, payer, and date.
- Keep detailed records of expenses.
Save receipts for all business-related expenses and categorize them for easy tracking.
- Separate business and personal finances.
Open a separate business bank account to track income and expenses and make personal draws.
- Check licensing requirements.
Ensure you have the necessary licenses and permits for your home daycare business.
- Digitize receipts.
Use a scanning app like “Receipt Lens” to digitize receipts, as receipts could fade over time, making them hard to read.
- Utilize Childcare Management Software.
Many childcare tax software is available now with features like accurate and detailed record-keeping, categorizing expenses, and generating tax reports. They can also provide features for receipt management, and mileage tracking. These software solutions often automatically calculate deductions and credits, reducing the risk of errors while keeping you informed about tax laws and deadlines for compliance.
For more details on the best childcare software of 2023, visit List of Best Childcare Software 2023
Frequently Asked Questions
1. How much can you deduct for daycare expenses?
The Child and Dependent Care Credit allows you to deduct up to $3,000 per child under 13, or $6,000 for two or more children under 13, for qualifying daycare expenses. This credit is based on a percentage of your income, with lower-income taxpayers receiving a higher percentage.
2. What documentation do I need to deduct daycare expenses?
To claim daycare expenses, you must keep records of your payments, including receipts, canceled checks, or other proof of payment. You’ll also need the name, address, and taxpayer identification number (TIN) of your daycare provider.
3. What can I write off on my taxes as a babysitter?
As a babysitter, you can deduct expenses related to your work, such as mileage for driving to and from babysitting jobs, supplies like snacks and toys for the kids, and training costs for CPR certification or other relevant courses.
4. Can you deduct daycare from taxable income?
Yes, you can deduct daycare expenses from your taxable income, up to the limits mentioned above. This means that the amount you spend on daycare can reduce your overall tax bill.
5. How do I get Form 2441?
Form 2441, Child and Dependent Care Expenses, is the form you need to file to claim the Child and Dependent Care Credit. You can download it from the IRS website or get it from tax preparation software like TurboTax or H&R Block.
Taxes might seem like a headache for home daycare providers, but with a little organization and knowledge, you can ace your tax game.
Tax preparation is not about numbers but understanding your business, maximizing deductions, and using credits wisely. You need to simply update and organize your files quarterly to manage your taxes without any complications.
If you still have any concerns, drop your queries in the comment section, and I’ll try my best to bring you well-researched and precise information.