Taxes & Home Child Care

Home day care can have tax breaks.

The Internal Revenue Service (IRS) classifies home day care providers as self-employed. Keeping accurate records of home day care expenses and income is necessary to calculate taxes owed to the federal government and the state government. Taxes are calculated on the net income of the day care provider, which is determined after all business expenses are deducted.

Calculations

Calculate the percentage of the home used for home day care.

Calculate the space used for home day care before beginning any tax preparations for home day care. The percentage of space used for day care is the most important part of determining the taxes owed. Business use of the home is a deduction and has a large impact on taxable income.

The time/space percentage is the method used by the federal government for determining all deductions for home day care use. This method is calculated by dividing the total space of the home by the total space used for home day care.

Then calculate the time the home is used for day care. Include time cleaning up the home for business, time for preparing meals, or lesson plans, also. Divide the total of hours spent for day care by the total hours in a week. This percentage is multiplied by the percentage of space used for day care. The resulting percentage is how taxes are calculated for business use of the home. Example: 87.5 percent for day care space, divided by 29.7 percent for time spent in day care, equals 26 percent. Twenty-six percent of business expenses for use of the home can be deducted for taxes.

Income

Keep accurate records of all day care income.

Home day care providers receive income from a variety of sources. The major source of income is the tuition from the parents of the children in care. Another income source is a food program that pays a percentage of the food served to the children.

Government agencies are also a source of income if voucher children are in day care. Any fees charged to the parents are considered taxable income and fees paid for running workshops are also taxable.

Expenses

Craft supplies are a deductible day care expense.

Home day care providers have two types of expenses. One expense is everything related solely to day care. These expenses are 100 percent deductible. The other expense is home maintenance. Home maintenance expenses use the time/space method for determining taxes.

Day care expenses include anything spent for day care and not used for anything else in the home. Some of the day care expenses include meals, playground equipment, toys, craft supplies, diapers, baby wipes, sandbox, cribs, playpens, playroom TV, sleeping mats, sheets, blankets, pillows, liability insurance, first aid supplies, training, licensing fees, safety equipment, office supplies, advertising and assistant salary.

Time/space expenses include shared expenses for the home. Home expenses include utilities, mortgage interest, maintenance, depreciation, vehicle expenses, and home improvements.

Benefits

Deduct expenses for home utilities.

The benefits of running a home day care are the many deductions for use of the home. Any improvements made to the home or yard maintenance are deductible, saving the day care provider excessive tax payments. Utilities savings are another tax benefit for home day care. The percentage paid for electricity, oil and water is a benefit not all homeowners receive. The larger the space used for home day care, the bigger tax deductions is allowed.

Warning

Keep all receipts in case of an IRS audit.

The IRS requires accurate record keeping for the self-employed. All business expense receipts must be kept for seven years and all business income must be the same as the parents of the children report to the IRS. The danger of being audited is very real for a self-employed person. Home day care providers need to be aware that business records must be specific even when working from home. Avoid fines from the IRS by filing income taxes on time with all the correct day care information and calculations.

References

• National Association for Family Child Care: "Tax Planning Can Save You Money"
• Child Care: Home Day Care: Tax Advantage or Tax Headache?
• Family Child Care Taxes: Child Care Tax Return Checklist

Resources

• Internal Revenue Service