RECORD KEEPING FOR SCHOOL-AGE CHILD CARE PROGRAMS
Steven K. Carter
CPA
Carter, Small & Hayes
Nancy H. Bull, Ph.D.
Educational Consultant
Copyright/Access Information
Good financial records indicate if a school-age child care program is financially successful. In addition, they signify how the program is performing in terms of income and expenses. Operating decisions can then be based on solid financial facts; lacking facts, expenses may exceed income and place the future of the program in jeopardy.
Complete financial records help the program provide better service to parents and children. They provide data to parents of payments made to the program for income tax purposes. They also enable the preparation of accurate tax return filings on the state and federal levels.
Records must be complete, accurate and up-to-date. Failure to keep them current is almost a guarantee of future financial difficulties. Establish a systematical method to collect and record financial information consistently. Waiting until the last minute makes accurate recordkeeping almost impossible.
This paper will focus on ten questions about recordkeeping including:
1. Is it worth the time?
2. How should income be tracked?
3. How should expenses be tracked?
4. What ways ensure the proper payment of bills?
5. What employee payroll records must be kept?
6. What taxes must be paid?
7. What is Form W-10? Why must it be completed?
8. What other federal information forms must be completed?
9. How should a budget for the program be developed?
10. How are fees calculated?
Let's explore each of these questions separately.
Are good financial records worth the time required to maintain them? Absolutely! Consider these reasons for doing so:
MINIMIZE TAXES. Only deductions which are adequately supported by proper documentation are allowed. If a tax audit occurs, canceled checks, invoices, receipts, etc., must be produced to support deductions claimed. Keeping proper documentation UP FRONT also serves as a reminder to claim deductions which might otherwise be overlooked.
AVOID UNNECESSARY COSTS. Costs incurred to reconstruct records after the fact are not cheap. Avoid these costs as well as those of making mistakes based on incomplete or inaccurate records by keeping records up-to-date.
HELP MANAGE THE PROGRAM. If financial records are complete, accurate and organized, the timely information needed to make a difference in managing the business and planning for the future will be available. In addition, bankers, creditors and loan officers are more supportive of credit requests based on visible, well-documented financial records.
Income to the program may come from a variety of sources. Keep track of each source separately. For example, record fees from parents separately from subsidies or grants.
The cash method of accounting is an easy way to record income and expenses. Income is recorded when it is received; expenses when the bills are paid. For example, if a parent pays a monthly fee in July, the income is recorded in July even if the payment is for services provided in June. If a bill is paid in October, the bill is posted in October, even if the supplies were received in August.
Cash flow may be improved by requiring parents to pay fees in advance on a monthly basis, or on a semi-annual basis with some small corresponding reduction in the total fee. These advance payments help cover expenses which occur on an ongoing basis.
Issuing receipts for all income is a good control and recordkeeping device. This helps to resolve any differences and provides a record of all fees or cash received.
Use receipt slips, designed especially for the program, with the program's name, address and logo, or purchase a receipt book at an office supply store. Be sure all receipts are numbered sequentially to facilitate auditing of financial records. Each slip contains the following information: amount received, description of time period covered and date of receipt. The use of a carbon copy system provides a record of all receipts written.
Perhaps one of the least-understood invisible drains on a program is undocumented cash transactions. The optimum way to track and maintain control over cash is to establish a separate checking account for the program. If the program is part of a larger organization, establish separate budget line items for program income and expenses.
All transactions should flow through the checking account and be posted as separate accounts. Deposit all cash within 24 hours. Pay for everything by check. Timely deposits are essential to good accounting control and cash flow management. Maintain a small, well-managed petty cash account for transactions too small to warrant the expense of writing a check.
Remember, for tax purposes, all payments must be properly supported by a receipt or a canceled check. If a petty cash fund is used, record the date, amount and purpose of each payment in a bound journal. The journal may be a simple ringed notebook, but must show all transactions from start to finish for the time period.
Use a purchase record to ensure the program is properly charged for only items actually received. Each time an order is placed or an item purchased, record a description of the item, the quantity, the unit price and the total price.
When an invoice is received and before paying, check to be sure the math on the invoice is correct. Multiply the number of items received by the unit price charged. Is the result the same as the amount on the invoice? Compare the invoice with the purchase record. Are they the same?
Then - and only then - pay the invoice. Mark it PAID and record the appropriate check number on the invoice. For future reference, file paid invoices by date paid or alphabetically by name of supplier. If
questions arise in the future, an accurate record of all actions taken has been established.
A voucher system may be used in place of the purchase record. As with a purchase record, first check the invoice carefully, and then complete the voucher. The voucher should include the following information.
Across the top, list the payee, vendor number, record number, date, amount, check number, invoice number, date of invoice, description, total amount, deductions or credits, and net amount. At the bottom of the voucher, identify the account number, name of account, amount debited, amount credited, approved for payment by, and entered and posted by.
USE TIME CARDS OR TIME SHEETS. All employees should be paid based on proof the hours claimed were actually worked. The easiest way is to maintain a time card or time sheet on each employee. This record should include employee name, dates worked, regular daily hours and overtime hours. Be sure supervisors initial or confirm all hours worked.
For hourly employees, use the time sheet to compute the amount owed; calculate by multiplying the number of hours worked times the agreed- upon rate(s) of pay. For salaried workers, the time sheet supports payment for the time worked during the pay period.
DEDUCTIONS FOR TAXES, BENEFITS, INSURANCE OR SAVINGS. One of the most crucial mandatory financial records deals with deductions for employees. Records must show that the tax was paid and the payment was correct.
Determine the amount to deduct, as required by law, for Social Security taxes (FICA) and employees' withholding for both federal and state income tax. Then make any other deductions such as pension plans, savings plans, or medical insurance. After all deductions have been made, compute the net pay for each employee; pay the employee by check, never by cash.
The check is documented proof the employee was paid the amount actually owed. Paycheck stubs are important records of net pay and deductions. Records of how deductions were computed and the basis for making each deduction should also be kept.
EMPLOYEE EARNINGS RECORDS are another important payroll record used to complete state and federal tax forms. The employee earnings record is a single, continuous record of income and deductions for each employee. Establish an employee earnings card for each person. The card should contain the following information on each employee:
- Name, address and phone number
- Social Security number
- Hourly pay rate
- Earnings history (gross pay amounts and the same information as on the paycheck stub)
Use the employee earnings record card to accumulate totals for each three-month period for which the program is required to file government payroll tax reports. Remember, payroll employee records must be kept at least four years and all other expense records at least seven years.
Not-for-profit businesses are subject to four types of taxes:
- Taxes on sales to outsiders (sales tax)
- Taxes on employees' gross pay (income tax)
- State and federal unemployment taxes
- Taxes on overall business income
(Please note: Forms discussed here are summarized at the end of this document.)
Each of the four types of taxes are explained below, as they relate to records to keep. Keeping good tax records is a necessary part of doing business. Tax laws are complex and change frequently. Seek competent, expert help in filing tax reports.
TAXES ON SALES TO OUTSIDERS: These taxes are commonly referred to as SALES AND USE TAXES. A sales and use tax is paid by a customer for the sale of a product or service. The state may require each business to acquire a state registration number for the purpose of keeping track of the amount of sales and use tax owed the state.
In Connecticut, a school-age child care program is not required to collect sales and use tax on services provided. Only if products are sold, such as educational supplies, would the program be required to
collect sales tax. When selling items, use a state sales and use tax chart to calculate the amount due. Record the sales and use tax separately from the cost of the item purchase. Use a single page with two different columns or separate pages. Be sure to record a description of the purchases and date of purchases to insure, if audited, the amounts collected can be verified. Be sure to check with your state department of revenue to find out about regulations pertaining to the collection of sales and use tax and what items might be exempt from this tax.
TAXES ON EMPLOYEES' GROSS PAY: From the time the first employee is hired, which may be the owner or director, an Internal Revenue Service (IRS) Employer Identification Number is required. Just as the registration number identifies the program for state sales and use tax purposes, the employer number does so for federal tax reporting purposes. IRS Form SS-4 is needed to obtain an employer identification number.
There are two types of taxes which must be computed for each employee: federal income tax and social security tax. A portion of these taxes is withheld from each employee's pay. Periodically, these taxes are remitted to the IRS, along with an additional matching amount the employer pays.
Federal income tax (see IRS Publication, Circular E) is computed using the employee's income for each pay period and withholding the amount due from the gross pay. First, Form W-4 must be signed by each employee indicating marital status and the number of exemptions claimed. This form protects the employer from underwithholding income tax from the employee's pay. If this happens, the employer is liable to the IRS for the amount owed.
Social Security or FICA taxes are comprised of the amount the employee pays as well as the employer contribution. To compute the employee's FICA tax due, use IRS Publication, Circular E. Calculate the amount to be withheld by multiplying the employee's gross pay by the percentage noted on Circular E. This is the employee's share of FICA taxes due and is deducted from the gross pay. The employer must match this amount dollar for dollar. The employer owes the IRS the sum of the employee's contribution and the employer's share of FICA taxes.
The timing for filing IRS forms and for making payments of these taxes depends in part on the amount owed. All employers must file IRS Form 941 once each quarter summarizing employee taxes paid or due for that quarter.
All employers must also make periodic payments directly to the IRS or make cash deposits with an authorized commercial bank for these taxes. Use IRS Form 8109 (*Federal Tax Deposit - Withheld FICA and Federal Income Taxes*) for each deposit. When payments are due depends on how many dollars are involved. Refer to Circular E for specific deposit rules.
For filing state income taxes, a copy of the program's 501(c)(3) letter obtained from the IRS and a completed copy of IRS Form 990 must initially be submitted. State income taxes must be paid by the 15th of each month. Quarterly state reports are filed similarly to federal reports.
TAXES FOR STATE AND FEDERAL UNEMPLOYMENT BENEFITS: If the school-age child care program has one or more employees, the program is required to contribute to state and federal unemployment insurance. Contact your state government for more information on state unemployment taxes.
For federal unemployment taxes, a rate of .8% (tax year 1992) is multiplied by the employee's gross pay up to a ceiling of $7,000. IRS *Unemployment (FUTA)* Form 940 is due once annually. However, employers must make quarterly deposits of the tax due to an authorized commercial bank. Using IRS Form 8109, those payments are due by the end of the month following each quarter.
If the amount owed at the end of the fourth quarter is less than $100, IRS Form 940 may be used. To reduce paperwork, employers can skip any quarterly deposit when the amount due that quarter, plus any previous deposits skipped, is less than $100. For example, if the amount due for the third quarter is $30 and the amount due for the first two quarters combined is $50 (for a total of $80 owed), payment for the third quarter may be skipped.
TAXES ON OVERALL BUSINESS INCOME: The rules governing liabilities for state and federal business are highly complex and in a constant state of change. Most tax experts agree that for a small business, the FORM OF BUSINESS is probably the most influential factor in determining the size of the tax liability.
For a school-age child care program, tax-exempt status may be possible. For more information on tax-exemption and not-for-profit school-age child care programs, see technical assistance paper, *Not-For-Profit Status* in the *Beyond Opening Day* series. Tax-exempt 501(c)(3) organizations are not subject to federal and state business income taxes, federal unemployment taxes and property taxes.
For federal business income tax purposes, the three most common forms of doing business are sole proprietorship, partnership and corporation. Each of these will be discussed here along with their tax implications. Remember there may be other considerations beside those involving taxation, in deciding with form of business to use. The only form of business which is eligible for tax-exempt status is the corporation.
- SOLE PROPRIETORSHIP is a form of business where all assets and debts are owned exclusively by a single owner or individual. The owner includes all income and expense of doing business on his/her personal tax return. Income from the business is taxed as personal income to the owner.
- PARTNERSHIPS differ from sole proprietorships in that there is more than one owner. Business income and expenses are divided based on the partnership agreement. For example, if the partnership agreement specified a 30-70 split in ownership, then the income and expenses would be divided by that same 30-70 split. A separate federal income tax return must be filed as the business is a separate entity from the owners.
- CORPORATIONS, like partnerships, are separate entities from the individual owners. A separate federal income tax return is filed for a corporation. The corporation is treated entirely separate from the owner's personal tax returns. The only exception is if an owner receives dividend or interest income from the corporation which must be reported on the personal tax return. A program must first be organized as a not- for-profit corporation before application may be made for tax-exempt status.
Check with your state department of revenue for information on corporate tax returns for your state.
For both state and federal tax purposes, tax rate structures differ for each of the three forms of business. In some cases, a sole proprietorship business might produce the lowest tax liability. In other situations, a corporation or a partnership arrangement might be more advantageous. The choice of a form of business is a very important tax consideration. Consult a tax advisor for advice.
Form W-10 is the Dependent Care Provider's Identification Number.
A school-age child care program must provide information to anyone whose child or other dependent is cared for if one of two possible conditions occur:
- If the parent or guardian intends to claim a tax credit for child and dependent care expenses.
- If the parent or guardian received benefits from an employer dependent care assistance program.
IRS Form W-10 is used for providing this information. For a 501(c)(3) federally tax-exempt program, fill in the program's name and address and write tax-exempt in the space for the taxpayer identification number (TIN).
Failure to provide this form may result in a fine of $50 for each failure unless the failure is due to reasonable cause and not willful neglect.
This section is specifically designed for those programs organized as 501(c)(3) organizations. Other programs do not need to be concerned with the following forms.
IRS Form 990, *Return of an Organization Exempt from Income Tax*, must be filed by the 15th day of the 5th month after the close of the program's fiscal year. For example, if the program's fiscal year closed on June 30, then Form 990 must be filed by November 15.
In addition, Form 990, Schedule A, *Organization Exempt Under 501(c)(3)*, must be filed at the same time. This schedule contains information concerning the activities of charitable organizations that claim PUBLIC CHARITY status.
The late filing of Form 990 or the failure to file without reasonable cause may result in a penalty of $10 per day up to a maximum of $5,000. Please note: if Form 990 is submitted with information omitted, the filing requirement is not met and the program may be subject to the previously mentioned penalties.
The due dates of Form 990 and Schedule A can be extended by filing Form 2758, *Application for Extension of Time to File*, with the IRS by the due date of the return.
In addition, a school-age child care program with gross unrelated business income of $1,000 or more must file Form 990-T, *Exempt Organization Business Income Tax Return*, by the 15th day of the fifth
month after the close of the program's fiscal year. UNRELATED TRADE OR BUSINESS is defined as any business not substantially related to the mission of the organization for its exempt purpose. The due date for Form 990-T may be automatically extended six months by filing Form 7004, *Application of Extension of Time to File*.
Tax-exempt school-age child care programs must make available for public inspection a copy of the program's three most recent annual information returns (IRS Form 990). Failure to comply with this public inspection requirement may result in a penalty of $10 per day or maximum of $5,000 per annual return.
Start the budget by estimating what the costs will be to provide services. Typical expense items for a school-age child care program include:
- Advertising
- Bank service charges
- Car expenses
- Debt payments
- Dues and publications
- Educational supplies
- Equipment
- Field trips*
- Food
- Fringe benefits (payroll taxes, health insurance, etc.)
- Insurance (liability, fire, accident, transportation, business, rental, etc.)
- Interest on debt
- Licenses to operate the program
- Miscellaneous
- Office supplies
- Postage
- Printing
- Professional services such as attorney and/or accountant fees
- Rent or mortgage payments
- Repairs
- Salaries and wages
- Special events such as parent get-togethers
- Staff development (conferences, workshops, seminar fees, travel expenses to and from training)
- Student transportation
- Taxes (property, sales and use, federal corporate or personal taxes) depending on tax-exempt status
- Telephone
- Travel and entertainment such as magicians, story tellers, or talent night
- Utilities (oil, electricity, gas, water, sewer, trash, etc.)
*Instead of building the cost of field trips into regular expenses, consider setting a separate field trip fee.
One simple way to start the budget process is to create a spreadsheet either on paper or with a computer. Computer spreadsheet software programs, designed for child care programs, are available or a single accounts payable system may be used. Place the name of each month in the fiscal year as a heading for columns in the spreadsheet; include a total column.
Next, place each expense item as the heading for a row in the spreadsheet. Be sure to use the last row for the total. Then estimate for each month what the expenses will be and total all columns and rows. Be sure the totals match.
Once expenses are recorded, then look at income. Many programs receive grants from state agencies to operate and to provide nutritious meals to the children. If the program is set up as a not-for-profit organization, donations may be solicited and may be an important source of income.
After estimating all other sources of income, determine the fees to charge. A good place to start is by subtracting the known sources of income, such as grants and donations, from total annual expenses. This will determine the net amount needed to be covered by fees. This net amount is then divided by the number of children in the program for the year. Divide this amount by the number of weeks in the program year to determine weekly fees.
Now review the figures to be sure the budget makes sense. Remember, expenses increase on non-school days. Consider one fee structure for school days and a separate one for non-school or vacation days. Also, compare weekly fees with those of similar programs in the area to see if the fees are in line with those charged by others. This will give a clear indication if expenses have been over- or under-estimated. Any great disparity in fees should indicate the need for additional analysis.
What happens if the fees have been miscalculated and expenses exceed income? It can easily happen with an increase in a major expense such a utilities. Since the program may not have a reserve fund, fees may have to be adjusted. Parents will not be happy if an adjustment occurs too often. This is another good reason to maintain up-to-date and accurate financial records.
Many programs use budgets as the basis for interim financial reports to give a sense of whether monthly income is meeting monthly expenses. No program can provide a stable educational effort if more money goes out than comes in. One way to prepare interim financial reports is to use a statement of operations showing income and expenses in columns. The first column indicates the sources of income and expenses. The second column indicates the actual amounts received and paid for the year so far. The third column indicates the budgeted amounts. The fourth column shows how much variance there is between the actual amounts and the budgeted amounts. If the variance is significant, the differences must be investigated and appropriate action taken to correct the situation.
Good recordkeeping enhances the program's ability to provide quality care to children. It can result in minimizing taxes and better control over expenses as well as insuring sufficient fees are earned to cover expenses. Keeping records is well worth the time spent to ensure bills are paid on time, items ordered are actually received, invoices are totaled correctly, taxes are withheld from employees' paychecks, and fines are avoided.
Good financial records project to the public a well organized and operated program ... one important step toward a positive professional image.
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