As a family child care provider, it’s important for you to become familiar with all the IRS requirements for filing your taxes. By following these recordkeeping and tax tips, you’ll be better able to organize your records, claim the maximum legal deductions, and reduce your final tax bill.
Keep your receipts for every business expense.
Most of the costs to clean, maintain, and repair your home can be partially deducted as a business expense (including light bulbs, toilet paper, garbage bags, snow removal, etc.).
Collect receipts whenever you go to the drugstore or hardware store and keep records of your online purchases. Mark your calendar when you go on field trips or travel for business purposes.
Start deducting immediately.
As a provider, you must report all income you receive for caring for children, even if you do not meet or have not yet completed local regulations or licensing requirements.
You should begin deducting business expenses as soon as you begin caring for your first child, even if you haven’t finished the licensing process yet. If you’re not licensed, the only expenses you cannot deduct are those connected to your house (utilities, insurance, taxes, interest, depreciation, and repairs).
Track food expenses.
Because food costs will probably be your single biggest expense, you should keep careful track of the number of meals you serve each day, including meals that are not reimbursed by the Child and Adult Food Care Program (CAFCP).
Multiply these meal counts by the standard meal allowance rate to claim food expenses without having to keep any food receipts.
Complete monthly reviews.
Don’t wait until the end of the year to collect your receipts and other records. Conduct a monthly review to make sure you have everything in order.
Keep your records in one place. Use envelopes to store receipts by category. Make sure that receipts are labeled and legible. If you forgot to take a receipt or if you couldn’t get one (parking meters, garage sales, etc.), make one of your own to track the expense.
Pay estimated taxes quarterly.
Because you are self-employed, you may have to pay some federal income tax before the end of the year. To find out if you must pay quarterly taxes, estimate your income and expenses for the entire year. If you will owe $1,000 or more in taxes on your net income, you may have to pay in quarterly installments — due April 15, June 15, September 15, and January 15.
There are a number of exceptions to this rule, however. For more information, see IRS Publication 505, Tax Withholding and Estimated Tax.
Treat substitutes and aides as employees.
If you hire someone as a substitute or helper in your business, you should treat this person as an employee, which means you must withhold Social Security and income taxes from their paycheck and pay federal and state unemployment taxes. You may also need to purchase workers’ compensation insurance.
Many providers treat helpers as independent contractors and do not withhold taxes, but this practice is not advisable. Only someone who is in the business of providing substitute care or is doing a special service can be considered an independent contractor.
Complete a household inventory.
Your house and the items used for your business are being worn out at a faster rate than if you were not providing family child care. As a result, you can deduct or depreciate a portion of the cost of these items, even those that you owned before you went into business.
Conduct a thorough room-by-room inventory, and list every item (furniture, appliances, lawn care equipment, etc.) in your house. Consult the Inventory-Keeper for a room-by-room listing of potential items to include.
Plan for year-end expenses.
If 40% or more of the long-term items for your business (those that will last longer than one year) are purchased during the last three months of the year, you may not get all the deductions for all your capital expenses for that year.
To avoid this “mid-quarter convention” rule, make your purchases before October or after December. If you start your business during the last quarter of the year, this rule will still apply to you.
Calculate your time-space percentage.
The number that will probably make the greatest difference on your tax return is your time-space percentage. This is used to calculate what proportion of your expenses for business and personal use can be deducted from your taxes. The more hours you work and the more space you use in your home, the lower your taxes.
Track all the hours children are present, from the moment the first child arrives until the last child leaves. Add all the hours that you use your home for business when children are not present — time you spend cleaning, cooking, preparing activities, recordkeeping, interviewing parents, etc. Track at least two months of these hours on a calendar to get a good average.
Then count the number of rooms you use on a regular basis for your business.
Learn more about how to calculate the final percentage — and download a helpful spreadsheet — on the Tom Copeland blog.
Record home improvements.
You should begin depreciating a portion of your home as a business expense. The amount you can depreciate is based on the purchase price of your house (minus the value of the land), plus all home improvements made before you went into business.
Record all your house improvements since you moved in (new roof, furnace, remodeling, etc.). Look for old receipts. Get replacement receipts from contractors, if necessary. As a last resort, photograph the improvements, and write down your best recollection of the cost and the date they were completed.
Keep records of any house improvements you make after you start your business. When you sell your home, these improvements may reduce the amount of taxes you have to pay.
For more business and tax-related tips, see the Family Child Care Record-Keeping Guide.