Child Care Payroll: 5 Costly Mistakes Every Center Owner Must Avoid

Estimated reading time: 12 minutes

Payroll is the single largest expense in most child care businesses — often consuming 60% to 70% of total revenue. However, it’s also the area where the costliest compliance mistakes tend to hide. From IRS penalties to Department of Labor investigations, a single child care payroll error can snowball into thousands of dollars in fines, back pay, and sleepless nights.​

The good news? Every one of these child care payroll mistakes is fixable — and avoidable — once you know what to look for. Below are five of the most common (and expensive) mistakes we see at child care centers across the country, along with what you can do about each one.

1. This Child Care Payroll Mistake Could Cost You 4x What You Owe: Misclassifying Workers

Misclassifying teachers as independent contractors instead of employees is the number one child care payroll mistake — and the IRS is actively looking for it.​​

It’s tempting to bring on classroom help as a 1099 contractor. After all, there are no payroll taxes to pay, no benefits to manage, and less paperwork to deal with. But here’s the problem: if that person works your schedule, follows your curriculum, uses your supplies, and you direct how they do the job — then the IRS considers them an employee, no matter what your agreement says.

Specifically, the IRS uses a three-part control test to make this determination:​

• Behavioral control: Do you control what work gets done and how the worker does it?

• Financial control: Do you control how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies?

• Type of relationship: Is there a written contract? Are benefits provided? Is the work a key activity of the business?

For child care centers, teachers, assistants, floaters, and aides almost always meet the definition of employees. They follow your lesson plans, work your hours, use your classroom, and report to your directors. As a result, that’s clearly not a contractor relationship.​

What’s at Stake

The penalties for misclassification add up fast:​​

• Back taxes: The IRS can hold you responsible for both the employer’s share and the employee’s share of Social Security and Medicare taxes you should have withheld.

• Penalties and interest: On top of the taxes owed, you’ll face additional penalties for failure to file, failure to deposit, and failure to furnish W-2s.

• State penalties: Many states impose their own misclassification fines. In some states, penalties can reach up to $100,000 and may even be treated as a felony.​

• Back pay claims: Misclassified workers can file claims for overtime, benefits, and workers’ compensation they were denied.

One child care owner who misclassified her staff ended up paying four times what she would have owed had she classified them correctly from the start.​

The Fix

Start by auditing every worker relationship at your center. If you control the schedule, the methods, and the tools, then that person needs to be on your payroll as a W-2 employee. If you’re unsure about a specific worker, the IRS offers Form SS-8 to request a formal determination. Better yet, work with an accountant who specializes in child care accounting to review your classifications before the IRS does it for you.​

2. Getting Exempt vs. Non-Exempt Wrong on Your Child Care Payroll

This child care payroll mistake trips up centers constantly — and it’s more nuanced than most owners realize.

Under the Fair Labor Standards Act (FLSA), employees are either exempt (salaried, no overtime required) or non-exempt (must receive overtime pay for hours worked beyond 40 per week). A common misconception is that simply paying someone a salary automatically makes them exempt. Unfortunately, it doesn’t.

To qualify as exempt, an employee must pass three tests:​

• Salary basis test: You must pay the employee a fixed salary rather than an hourly wage.

• Salary level test: That salary must meet a minimum threshold — currently $684/week ($35,568/year) at the federal level, although several states set the bar significantly higher.

• Duties test: The employee must perform executive, administrative, or professional duties as defined by the FLSA.​

Where Child Care Centers Get It Wrong

Most classroom teachers, assistants, and aides at child care centers are non-exempt, which means you must pay them overtime. While the FLSA does include a “teacher exemption,” it’s narrowly defined — it applies to teachers at educational establishments, and whether a child care center qualifies depends on specific criteria such as having an established curriculum and employing credentialed instructors.

Moreover, even when a center director or administrator is properly classified as exempt, their classification can change based on their actual duties. For example, if your director regularly steps into a classroom to cover for absent teachers — supervising children, leading activities, coordinating meals — those are non-exempt duties. Do this often enough, and it can shift their classification and trigger overtime obligations.​

In fact, the Department of Labor actively investigates child care centers for wage and hour violations. If you’ve misclassified employees as exempt and they worked overtime without compensation, your center may owe:​

• Back wages for all unpaid overtime — potentially going back two to three years.

• Liquidated damages equal to the amount of back wages (essentially doubling the total).

• Additional penalties for willful violations.

The Fix

Review every position at your center carefully. Classroom staff should almost always be classified as non-exempt. Directors and administrators may qualify as exempt, but only if their actual daily duties — not just their job title — meet the FLSA requirements. Therefore, you should document job descriptions clearly and revisit them whenever roles shift. If you’re regularly asking exempt employees to cover non-exempt duties, it’s time to reconsider their classification or your staffing strategy.

(For a deeper dive, read our full article: Childcare HR Compliance 101: Exempt vs. Non-Exempt Employees.)

3. Missing Payroll Tax Deposit Deadlines — A Child Care Payroll Penalty Trap

Child care payroll taxes are not optional, and the IRS does not offer grace periods. The moment you miss a deposit deadline, the penalty clock starts ticking.

Most child care centers fall into one of two IRS deposit schedules:​

• Monthly depositors: You must deposit payroll taxes by the 15th of the following month.

• Semi-weekly depositors: You must deposit within a few days of each payroll run, depending on your pay date.

New employers generally start on the monthly schedule. However, as your payroll grows, the IRS may bump you to semi-weekly without notifying you directly — you’re expected to know based on your lookback period.​

How Penalties Stack Up

The IRS failure-to-deposit penalties escalate quickly:

To put that in perspective, on a $10,000 payroll tax deposit, being just one week late costs you $500. Wait more than 15 days, and you’re looking at $1,000 — plus interest.​

Additionally, there’s a critical trap that catches growing child care centers: if your accumulated payroll tax liability hits $100,000 on any single day, you must deposit by the next business day, regardless of your normal schedule. Multi-location owners are especially vulnerable to this rule.​

On top of federal penalties, many states impose their own. For instance, some states charge an additional 10% on late deposits plus interest at their own statutory rates.​

The Fix

First, know your deposit schedule and set up calendar reminders. Better yet, automate it entirely. Most child care payroll services handle deposits automatically, which eliminates this risk. If you’re still doing payroll manually or using basic software, this is one of the highest-risk areas in your business. Learn more about finding the right payroll solution for your center.

4. Not Knowing When Your Child Care Center Must Offer Health Insurance

As your child care center grows, you may be approaching a compliance trigger that many owners don’t see coming: the Affordable Care Act’s employer mandate.

Under the ACA, businesses with 50 or more full-time equivalent employees (FTEs) are classified as Applicable Large Employers (ALEs). As an ALE, you’re required to offer health insurance that meets minimum standards to at least 95% of your full-time workforce. For ACA purposes, full-time means 30 or more hours per week.

Why Child Care Centers Are Especially Vulnerable

The 50-employee threshold isn’t based on headcount alone — it also includes full-time equivalent calculations. In other words, the IRS combines part-time employees’ hours to create additional FTEs. Consequently, a center with 35 full-time teachers and 30 part-time aides could easily cross the 50-FTE mark without the owner ever realizing it.

Furthermore, multi-location owners face additional exposure. If you operate more than one center under common ownership, the IRS aggregates all employees across all locations for ACA purposes. Two centers with 28 employees each could therefore trigger ALE status together.​

Seasonal fluctuations also play a role. Summer programs, after-school staff, and temporary hires all factor into the calculation, although a limited seasonal worker exception exists if you exceed 50 FTEs for no more than 120 days.​

What’s at Stake

The 2026 ACA penalties are the highest they’ve ever been:

• Penalty A (no coverage offered): $3,340 per full-time employee per year (minus the first 30 employees). For a center with 55 FTEs that fails to offer coverage, that works out to roughly $83,500 annually.​

• Penalty B (coverage offered but doesn’t meet standards): $5,010 per employee who receives subsidized coverage through the Marketplace.

These penalties apply when even one full-time employee obtains subsidized coverage through a government Marketplace.​

The Fix

If you’re approaching 40+ employees across all locations, start tracking your FTE count monthly. The ACA uses a look-back measurement period — typically the prior calendar year — to determine ALE status. Getting proactive gives you time to plan for the cost of offering coverage rather than facing surprise penalties. An accountant who understands both your payroll data and tax reporting (including Forms 1094-C and 1095-C) can help you monitor this threshold and build the cost into your budget before you cross it.

5. Depositing 401(k) Contributions Late — A Hidden Child Care Payroll Violation

If your child care center offers a 401(k) plan, there’s a compliance deadline that many small employers overlook — and the Department of Labor takes it very seriously.

When you withhold 401(k) contributions from an employee’s paycheck, those funds legally stop being yours the moment you withhold them. The DOL then requires you to deposit them into the plan as soon as they can reasonably be segregated from your general assets.

The Actual Deadlines

For small plans (fewer than 100 participants), the DOL provides a safe harbor: deposits made within 7 business days of each pay date are automatically considered timely.

Importantly, the 7-day safe harbor represents the outer limit, not a target. If the DOL reviews your deposit history and sees that you previously deposited within 1-2 days, they will hold you to that faster standard going forward. In other words, consistency matters greatly.​

For larger plans (100+ participants), no safe harbor exists. Instead, the DOL generally expects deposits within 3 to 5 business days.​

One common violation involves holding contributions from multiple pay periods and making a single monthly deposit. However, the DOL applies the rule to each payroll period separately — meaning you cannot batch them together.​

What’s at Stake

The DOL treats late 401(k) deposits as a prohibited transaction under ERISA. Essentially, the DOL views it as an impermissible loan from the plan to the employer — even when the delay was completely unintentional. As a result, consequences can include:​

• Lost earnings: You must calculate and deposit the investment returns participants would have earned had you deposited the money on time.

• Excise taxes: The IRS can assess a 15% excise tax on the prohibited transaction amount.​

• Correction costs: The DOL’s Voluntary Fiduciary Correction Program (VFCP) allows self-correction, but only if lost earnings are $1,000 or less and you make the late deposits within 180 days. Miss those windows, and you’ll need to file a formal application.

• Form 5500 implications: You must report late deposits on your plan’s annual Form 5500 filing, and the DOL cross-references these filings to identify discrepancies.​

The Fix

Set up your child care payroll system to automatically transmit 401(k) contributions within a few days of each pay date — and never batch contributions across pay periods. If you discover that you’ve been making late deposits, act quickly. The DOL’s self-correction program provides a path to fix the problem without a formal investigation, but the correction window is limited. An accountant or plan administrator can help you calculate lost earnings, file the necessary notices, and get your deposit process back on track.

Don’t Let Child Care Payroll Mistakes Drain Your Business

Every one of these child care payroll mistakes is happening right now at centers across the country. They’re not caused by bad intentions — they’re caused by busy owners wearing too many hats, relying on outdated processes, or simply not knowing that the rules have changed.

The common thread? Each mistake carries real financial consequences — penalties, back pay, excise taxes, and legal liability — that can quietly drain thousands from your business. On the other hand, each one also has a clear, straightforward fix.

If any of these sound familiar, schedule a call with Honest Buck Accounting. We specialize in child care payroll, bookkeeping, and tax compliance — so you can stop worrying about penalties and get back to running your center. You can also explore our resources on how to pay yourself as a child care owner, tax write-offs every center should know, and the minimum wage changes for 2026.