TAX GUIDELINES FOR FAMILY DAY CARE
National Network for Child Care's Connections Newsletter
Pam McNichols, B.A.
Taxpayer Service Specialist
Internal Revenue Service, Springfield, Illinois
Copyright/Access Information
In any business, you have to think about taxes. You don't know
how profitable your business is until you know how much is left
after taxes. Good records of income and expenses will help you
pay only what you owe. In this article, we'll look at record keeping
and income and expense items. We'll also discuss federal income
tax, social security tax, and estimated tax for day care providers.
A good record-keeping system gives you all the information you need. You should have a business checking account to deposit day care income and to write checks for expenses. Canceled checks and expense receipts should support each other. If you write a check payable to cash for a business expense, make sure the receipt for the cash payment is in your records. Keep receipts and statements for three years after you file a return.
Keep records of all fees received from parents. You should give a receipt to each parent and keep a copy for at least three years. These are "gross receipts" for your business. Money from the Child Care Food Program should be listed as "other income" for easy identification.
Keep track of the following expenses, and be sure to get separate receipts. These are all fully deductible. Record all money spent for food; household daycare supplies such as soap, toilet paper, towels, and tissues; and toys and play supplies such as crayons, markers, paint, clay, records, and tapes. You can also deduct birthday and Christmas gifts to children. Record all educational expenses such as admission costs for field trips; memberships and subscriptions to child care organizations; and fees for day care seminars that you attend.
You can deduct standard operating expenses such as file folders, ledgers, calculators, xeroxing, postage, insurance, advertising, and legal or accounting fees. You can also deduct car expenses. Keep a log of the date, place, purpose, and mileage for each trip. Day care shopping, field trips, picking up children at school, or travel to courses related to your business all count. You can deduct 27-1/2 cents per mile.
Some items such as cribs, playpens, high chairs, car seats, and swing sets can be depreciated over seven years. A special fast depreciation election (IRS Code Section 179) allows an immediate deduction for up to $10,000 of these items. Partial deductions. Some items are partially deductible. These are usually expenses which must be divided between business and personal use. Figure car expenses by using mileage for business use as a percentage of actual expenses. To determine what part of a home computer or VCR can be depreciated, use hours of use for business purposes.
The biggest partially deductible expense is use of the family home in the business. To determine how much to claim, find the number of square feet used for your business and the number of hours you provided care. Use the following formula:
1. Figure the percentage of home space used in day care.
Example: 3,200 sq ft used for day care divided by 4,000 total sq ft in your home equals 80% (space)
2. Figure the percentage of time your home is used for day care.
Example: 2,600 hours per year divided by 8,760 total hours per year equals 30% (time)
3. Multiply the space percentage by the time percentage:
Example: 80% x 30% = 24%
The provider could claim 24 percent of rent, utilities, interest, property taxes, and depreciation. Some loss restrictions and carry-over provisions apply to the business use of your home.
Income less all allowable expenses gives net profit or loss. Net profit is added to other income on an individual income-tax return. For 1991, the income-tax rate is 15, 28, or 31 percent, depending on how much other taxable income you have. Social security self-employment tax is 15.3 percent on up to $53,400 of adjusted net profit. From $53,400 to $125,000, you owe 2.9 percent. Enter your social security self-employment tax on the federal income-tax form. It becomes part of the total tax due. A special subtraction of half the computed social security tax lessens the impact of the 15.3 percent.
Self-employed persons must estimate their total tax and pay 90 percent of the total during the year. An estimate based on 100 percent of last years tax is also acceptable. You send payments quarterly. You will need a quarterly voucher form.
Form W-10, or its equivalent, must be signed by the day care provider and given to the child's parent. The parents must have the form to claim child care credits or employer dependent-care assistance.
For more information on federal taxes, call 1-800-829-3676. They can send you the following forms and publications.
1040 and Instructions
1040 Schedule C (Profit and Loss)
1040 Schedule SE (Self-Employment)
1040 ES (Estimated Tax)
4562 and Instructions (Depreciation)
8829 (Business Use of Home Worksheet)
W-10 (Dependent Care Providers Identification and Certification)
334, Tax Guide for Business
583, Information for Business Owners
587, Business Use of Home
Basic Guide to Family Day Care Record-Keeping
1992 Calendar Keeper (includes forms for record keeping)
1991 Family Day Care Tax Workbook
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