What Daycare Business Owners Need to Know About Taxes
Running a childcare business is incredibly rewarding. Every day, you and your staff make a real difference to the parents who trust you to care for their kids.
But just like any other business, you need to pay taxes. Daycare taxes work in the same way as taxes in most other industries. You’ll need to keep records, file returns, and stay on the right side of the IRS.
Here’s everything you need to know about keeping your childcare taxes in order.
Your daycare’s legal structure
Daycare services in the United States fall into approximately two categories: Family Day Cares, where someone runs a small childcare business from their home; and larger businesses known as Child Care Centers.
Under IRS guidelines, your business is classed as a Child Care Center if daycare “is usually provided in separate facilities apart from the owner’s residence”. Child Care Centers generally employ staff, and the business may be co-owned by multiple people.
The guidelines further note that, “many child care centers are organized as corporations (Form 1120), S corporations (Form 1120S) or partnerships (Form 1065).”
These company types each have different tax structures:
Profits earned by corporations are subject to corporate tax. Shareholders are paid by way of dividends, which might be subject to additional income tax. Shareholders are not personally liable for any of the corporation’s debts.
- S Corporations
Profits pass directly through to shareholders. There’s no corporate tax, but shareholders will have to declare earnings on their personal tax return. Shareholders have no personal liability.
An informal arrangement between two or more people. Profits pass through to the partners, who declare any earnings on their personal tax returns. Partners may be fully liable for the partnership’s debts (unless they are registered as limited partners.)
Which of these structures results in the lowest daycare tax bill? That depends on the size of your business, as well as the personal tax profile of each partner or shareholder.
Company structure is a big decision. If you think it might benefit your business to restructure your company, seek expert advice before you do so.
What daycare taxes will I pay?
Daycares are subject to the same taxes as any other business entity in the United States. This includes things like:
· Corporate income tax
This tax applies if you’re structured as a corporation. The federal rate is currently 21 percent, but state and local rules mean that your effective rate will be different. Corporate tax is complex and you will definitely need professional help to manage this.
· Payroll tax
If you employ staff, you will have to pay social security and Medicare taxes. You must also withhold part of their salary to cover their income taxes. You’ll need to make an accurate calculation of each employee’s tax liability, bearing in mind that they may be entitled to certain tax credits.
· Property tax
Your commercial premises may be subject to property taxes, calculated in the same way as any other business.
· Sales tax
Daycare is not classed as a retail sale, so you do not have sales tax to charge parents. Your business will pay sales tax on items you purchase, however. If you buy equipment from out-of-state, you may have to pay an additional Use Tax.
· State and local taxes
There may be further taxes and charges related to operating a childcare business in your town. Speak to a tax expert for guidance.
Remember, if you’re officially classed as self-employed, then you must pay your own taxes on money earned from your daycare business. That means income tax on all earnings, plus self-employed tax to cover your social security and Medicare contributions.
Keeping your daycare tax compliant
If you don’t meet your tax obligations, you could face an IRS audit, as well as some hefty fines.
Thankfully, there’s no need to worry about such issues, as long as you stay on top of everything and keep detailed records. Here are a few essential tips:
· Use a childcare management system
Procare, Family, and Jackrabbit Care are full-featured childcare management systems (CMS) that will help you control every aspect of your business. With the right software in place, you can make sure that your invoices and staff schedules are accurate at all times. You will need this data to be correct when you’re filling out your next return.
· Keep a close eye on payroll
You’ll need to track employee hours so you can accurately calculate the correct amount of income tax to withhold. Hours worked will also impact your bill for social security and Medicaid taxes, so be sure you’re keeping accurate records.
· Understand deductibles
Did you know that the following things may count as deductibles?
o Bank fees
o Advertising for new customers
o Work-related education for yourself and staff members
Every penny you spend is potentially deductible. Keep every invoice and receipt, and have your accounting consultant help you figure out what’s deductible and what’s not.
· Switch to electronic payments
Cash payments can lead to discrepancies in your accounts. Cash goes missing, payments are logged twice, staff make mistakes when giving change – all of these things can happen when handling cash. Encourage your customers to switch to fully electronic payments where possible. Not only do they have greater peace of mind, but you’ll have a verifiable record of all money in.
· Know your tax credits
Tax credits can bring down your overall liability by a lot. Credits are applied to your gross earnings, which brings down your overall taxable income. There is a wide range of tax credits available at local, state and federal level, including tax credits for offering employment opportunities, going green, or making your business more accessible.
· Get help sooner rather than later
Bookkeeping is not easy, even for a small daycare. As your business grows and moves to more locations, you may find that your drowning in a sea of paperwork.
Don’t let yourself get overwhelmed. Work with a professional to make sure your taxes are done right. Schedule a Discovery Call to speak with an Honest Buck expert today.