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This blog post is all about home daycare taxes.
DAYCARE TAXES
Understanding Daycare Taxes
All income must be reported regardless of whether paid by check, credit card, or cash.
Your accountant may want you to pay estimated quarterly taxes so you don't have a large amount to pay at the end of the year. Ask your accountant when you meet with them. Speaking of, make sure you hire an experienced accountant for a home daycare business!
Have a separate checking account for your business. All of your income will be deposited into this account. Any expenses that are 100% business expenses should come out of this account as well. Shared expenses, meaning expenses that are both personal and business, can come out of your personal checking. For example, your utilities are shared expenses, pay for them out of your personal account. When it’s time to pay yourself, write yourself a check from your business account. Trust me, this makes it so much easier to track things later if needed.
Keep receipts and good records! I’ll dive more into this later.
Time-Space Percentage
Due to running a daycare business out of your home, you share expenses between your business and personal use. In order to know what the daycare use versus personal use is, a time-space percentage formula is used.
Time-space percentage is single-handedly the most important record to have accurately for your daycare taxes.
There is a special formula to figure out your time-space percentage. Your accountant will know how to figure this out for you. You need to track the total hours you worked for the year, the total square footage of your home, and the amount of square footage that is used for your home daycare.
This requires you to keep track of every hour you work with children in your home and when you're working on the business without children. Tom Copeland is the home daycare tax guru and breaks this down in his book Family Child-Care Record-Keeping Guide. I HIGHLY, highly, highly suggest you grab this book immediately and read it every year to refresh your knowledge! I still do after twenty years as a home daycare business owner.
How To Organize Taxes
Keeping accurate records is vital as a business owner! You need a way to keep them organized as well.
Keep all of your receipts and expenses in a basket for the month. Keep your daycare planner open on the month view, and track the meals on it at the end of the day. Also, track the hours worked for the day, including any hours outside normal daycare business hours, such as trips made or cleaning. For example, if you're open 6-5 but you prepped for 30 minutes before and then cleaned for 30 minutes after, you would write down 12 hours for the day. You could easily write the miles driven for the day on the calendar as well.
Then, at the end of the month, grab the planner and receipts to record. Use an expenses tracking spreadsheet to track all of your deductions in one place. This editable spreadsheet is specifically designed for daycare taxes and has already been created with the correct tax categories.
The expenses tracking spreadsheet auto-calculates the total expenses and income for the year. It keeps track of the total amount each family paid, allowing you to give them proper documentation at the end of the year! The best part is you're able to print the total annual sheet and hand it over to your accountant because it has all of your business expenses and income in one place!
At the end of every month, after you’ve entered your expenses, hours, miles, and income into the expenses tracking spreadsheet, file the receipts into a manila envelope labeled "year". Sticking to this method keeps you from panic and stress come January!
Sticking to a daily and monthly schedule keeps tax prep as simple as possible and helps you not to miss out on any tax write-offs!
Tax Deductions Business Expenses
In Tom Copeland's book, he discusses that the names of the tax categories aren't as important as knowing what the actual tax deductions are and keeping good records.
Here are a few tax categories and what would fall under each tax category. These may not apply to your business, nor is this an exhaustive list.
Tax Categories for business expenses:
Utilities~ internet, phone, electricity, TV subscriptions, water, trash
Home Repairs~ anything repaired in the home
Cleaning Supplies~ laundry detergent, dish soap, dishwasher soap, hand soap, toothpaste if brushing kids' teeth, disinfectants, trash bags, baggies, toilet paper, paper towels
Childcare Subscriptions~ educational apps, payment apps, book subscriptions
Professional Development Training & Licensure Fees~ CPR, professional development courses, and licensure fees
Toys~ toys
Books~ professional development, children's books, and magazines
Office Expenses~ printers, printer paper, printer ink, printer subscription
First Aid~ fire extinguishers and inspection fees, first aid supplies
Craft Supplies~ construction paper, sensory bin items, crayons, markers, glue, tape, paper, pencils, etc
Home Property Tax~ home property tax
Business Liability Insurance & Legal Fees~ business insurance, LLC fees etc
Car Insurance~ explanatory
Car Property Tax~explanatory
Car Payments~explanatory
Car Interest~explanatory
Car Gas & Maintenance~ gas, oil changes, tires, windshield wipers, any repairs
Mortgage~ mortgage insurance, property taxes, or renters insurance
Wages~ employees wages and retirement
Taxes~ employer paid taxes, accountant fees for the business
Payroll Subscription~ payroll services fee, checks, bank fees
Hopefully, you have a better understanding of daycare taxes and feel more confident tracking your business expenses and income.
Related posts:
Beginner's Guide: Taxes For Daycare