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A home daycare makes income and with income comes taxes. Where do you even start on your taxes for in home daycare? Business taxes can be a complicated subject, but with patience and a little planning, it won’t be as bad as you think. For more information about running a home daycare click here.
For information on how to start a home daycare, click here.
How much do daycare providers pay in taxes?
The number one question I hear about taxes is how much will I pay. You can expect to pay around 20% of your profit in income taxes. But there is so much to home daycare that is not profit. That’s where deductions come in. If you don’t pay your taxes in quarterly, you could be penalized, so taxes are serious business.
In home daycare taxes are fairly involved. I am not an expert although I’ve been doing my own taxes for my in home daycare for 25 years. I’m not a tax professional. So, I divert all expert questions to Tom Copeland, the premier home daycare tax expert in the country. He’s a great advocate for providers.
Home Daycare Tax Deductions List
There are 14 major tax deductions for in home daycare providers. They are:
- Vehicle expenses (including mileage)
- Office expenses
- Repairs and maintenance
- Wages for employees
- Household/Yard Expenses
- Mortgage Interest/Rent
What is a tax deduction? It can be overwhelming, but let me break it down for you. An expense that is deducted against business income is a deduction. It saves you money because whatever you deduct from your income, you don’t have to pay taxes on.
A deduction, as defined by the IRS is a necessary expense that is helpful and appropriate for your trade or business. Common and accepted.
The best way to keep track of your deductions or expenses is to make a spreadsheet and take each receipt you have and record that expense in a category. I use the schedule C from the IRS to make the categories so it’s easier to fill out my forms at tax time. Doing it shortly after the expense occurs is the best way to stay on top of it and not lose receipts or forget what the expense was.
Home daycare tax deductions worksheet
Before you go through your first (or 30th) year in home daycare, I implore you to RUN and buy Tom Copeland’s tax workbook. Even if you pay an accountant to fill out your tax forms, this book will help you organize your expenses and prepare them for the tax preparer.
I recommend you give the preparer the workbook to help them make sure they get all of your expenses counted that they can. Many tax preparers are unfamiliar with the finite laws of home daycare taxes and this could save you a bundle of money.
You can find a copy of the schedule C in the book and make your worksheet from that. And there are lines and worksheets in the book that will help you figure out how much of what expenses are deductible. We will have a brief overview here.
When you are self-employed, you are not going to have state and federal taxes withheld from a paycheck. So, you are responsible for figuring and paying the taxes you owe the IRS. It is costly, but part of owning a business.
The first thing you need to know about is time/space percentage. It can sound complicated, but many deductions are 100% deductible and many are only deductible at your time/space percentage. This is the time you spend working in your home on your business and the percentage of space you use in your home for business figured into what percentage of your items are deductible.
If you buy toys and your kids play with them, the toys are deductible at the time/space percentage. If you buy toys and you don’t have kids at home, the items are 100% deductible. If you buy toilet paper, it’s time/space percentage deductible because your family uses toilet paper too.
There are other percentages as well. For instance, if you pay for Netflix for your daycare kids, but once a month, you and your husband get a Netflix movie, your percentage may be higher. Let’s say you let the kids get a Netflix movie every Friday, but the first Saturday of the month, your family gets one, then your deduction percentage of the Netflix bill is going to be 80% instead of time/space percentage.
In order to use a different percentage for the deduction, you need to make a spreadsheet or keep a list for a couple of months to prove to the IRS that it’s different. It sounds complicated, but really, it’s not that hard once you get used to dividing everything you spend up like that. If you think it’s easier to take the time/space percentage, that’s okay too.
Netflix is like $10 a month, so the difference in the deduction is just a few dollars. Decide what is worth your time. Not everything will be. Check out Tom’s article on how to figure your time/space percentage here.
When figuring it, don’t forget to not only count the number of hours you WATCH kids every day but also what you do when they are not there. Such as cooking, lesson planning, putting away groceries, dishes, laundry, cleaning, organizing, advertising and networking, talking to parents on the phone and in interviews, online training, social media and website updates, TAX preparation, record keeping, and more.
Also, don’t forget that some spaces are regular use and some are exclusive use for the daycare only and your family doesn’t use them. That makes a difference in your time/space percentage as well. Tom’s articles and books will help you figure it out. Don’t get overwhelmed by your taxes for in home daycare.
There are so many child-related supplies used directly by the daycare kids you’ll need for daycare. For example, toys, books, games, crafts, art supplies, nap mats or cots, sheets, pillows and blankets, dishes and silverware, toy containers, pack and plays, changing tables, cribs, bouncers, décor, music, playground equipment, curriculum, and even diapers and wipes.
Remember to not on each receipt if your own children share the use of these items. Then there will be expenses for your residence to maintain it such as insurance, utilities, repair, improvement, taxes, interest, etc. As well as fencing, insulation, heat and air repair or replacement, flooring, patios, etc.
You’ll also have furnishings and appliances such as a couch, tv, chairs, tables, shelving, desks, dishwasher, stove, washer and dryer, fridge, microwave, vacuum, etc.
Then there are daily supplies such as napkins, paper products, toilet paper, paper towels, cleaning supplies, dish soap, hand soap, Landry soap, garbage bags, zip bags, foil, plastic wrap, air fresheners, light bulbs, etc.
Also, remember home décor is part of keeping a good appearance for your home daycare business, so you can write off your time/space percentage of clocks, wall décor, curtains, Knick knacks, throw pillows or anything else you use to make your home look inviting for keeping children. This is all part of taxes for in home daycare.
There are also office expenses such as pens, pencils, file folders, ink, paper, printers, computer, receipt books, envelopes, stamps, photocopies, and faxes if you have them made at the store.
Then there are other expenses you can claim on taxes for in home daycare such as activity expenses, curriculum, field trips, bank fees, dues, gifts for the kids and their families, professional services such as a lawyer, car or truck expenses, yard services, feeds paid to a tax preparer, advertising, and more.
And don’t forget the great big one, FOOD! You’ll spend thousands feeding these sweet looking little lumberjacks and that’s all deductible. If you get on the food program, you’ll have to claim their payment as income, but you can claim the food as an expense so it won’t raise your taxes much.
The first step is figuring your income. That is parent payments, subsidy payments, any grants or loans, and food program payments. Your bank statements will help you figure this as well as your payment records for each payment the families pay you.
Yearly Daycare Receipt
You can fill out a daycare receipt for the end of the year totals for each family like this one and give it to each family for their taxes as well. Are we required to? No. But it’s helpful and good business practice. It makes you look professional as well. Once you get the family totals done, add them up with your other income, and print out all your tax forms.
Most providers will need a 1040, Schedule 1, 2 and 3, Schedule C, Schedule SE, 8829 and 4562. Some will need EIC and others as well. Start with the schedule C, everyone will need that one and you need it to fill out all the others. And get Tom’s workbook ordered! And you’re going to need an EIN number for your home daycare business taxes.
Here is a printable PDF you can use to check your lists and make sure you are getting all of these deductions. Of course, it’s not an all-inclusive list but will help you think of other deductions you may have.
Once you have your income and deductions listed and totaled, you are ready to go to the next step and start filling out your taxes with Tom’s workbook.