Childcare Accounting FAQ
Welcome to the Honest Buck childcare accounting FAQ. The questions below are the ones we hear most often from childcare center owners. They cover tax, bookkeeping, advisory, audit, pricing, and how we work with clients. Each answer is written by a CPA firm that has worked exclusively with childcare since 2013. That focus shows. The advice reflects the real financial life of running a daycare, preschool, or multi-location childcare operation. It is not generic small business advice. If your question is not in this childcare accounting FAQ, schedule a consultation and we will answer it directly.
What can I actually deduct as a childcare business, and how do I make sure I’m not missing anything?
This is one of the most common questions in our childcare accounting FAQ, and the honest answer is that most centers leave deductions on the table. Childcare businesses can deduct a wide range of expenses. The common deductions include classroom supplies, food under CACFP where applicable, staff wages and benefits, training, professional services, rent or mortgage interest, utilities, insurance, vehicle expenses for business use, and depreciation on equipment. The less obvious deductions are where most centers leave money on the table. These include the Section 179 deduction for classroom equipment and playground installations. Cost segregation studies on owned buildings produce accelerated depreciation. Pass-through entities should look at the Qualified Business Income deduction. The full picture depends on your entity type and how your books categorize expenses. Schedule a consultation and we’ll show you exactly where you may be leaving money on the table.
Should I be an LLC, S corporation, or something else, and what’s best for taxes and liability for my daycare?
This is one of the more strategic questions in our childcare accounting FAQ. The right entity for your daycare depends on revenue, ownership structure, payroll tax exposure, and growth plans. A single-member LLC offers simple liability protection. By default it is taxed as a sole proprietorship. That means you pay self-employment tax on all profit. An S corporation election can reduce self-employment tax significantly once your profit exceeds roughly $60,000 per year. The trade-off is that S corp owners must take reasonable compensation through payroll. That adds administrative complexity. Multi-owner centers may benefit from a partnership or multi-member LLC. Non-profit centers typically operate as 501(c)(3) organizations with different filing requirements entirely. The IRS publishes general guidance on business structures, but the right choice for your specific center is rarely obvious from the public materials. Schedule a consultation to discuss which structure best fits your situation.
How should I keep my books each month so I always have clean, up-to-date financials?
Clean monthly books are the foundation of every other answer in this childcare accounting FAQ. They require three habits. First, reconcile every bank and credit card account weekly. Second, maintain a consistent chart of accounts that maps to how you actually run the business. Third, run a defined month-end close. That means categorizing transactions, recording accruals, and reviewing a profit-and-loss statement before the next month begins. Most childcare centers benefit from QuickBooks Online with a customized chart of accounts. The chart should separate tuition revenue from subsidy revenue. It should distinguish infant room expenses from preschool expenses. State funding should be tracked separately. Schedule a consultation if your current books leave you uncertain about your real monthly performance.
What percentage of my revenue should go to payroll and rent so I know if my center is healthy?
Healthy childcare centers typically run payroll at 45 to 60 percent of gross revenue. Rent or mortgage usually runs at 8 to 15 percent of gross revenue. The exact ranges vary by region, program mix, and accreditation level. Centers paying more than 70 percent of revenue on payroll are at structural risk regardless of how busy they appear. Centers paying less than 40 percent on payroll are often underpaying staff. The hidden turnover costs don’t show up in the payroll line, but they’re real. Our five KPIs every childcare center should track monthly guide walks through the full set of healthy benchmarks. Schedule a consultation if your numbers fall outside these ranges.
What records do I need to keep for tuition, subsidies, and grants so I’m audit-ready?
Audit-ready childcare records cover several categories. Start with enrollment agreements for each family. Daily attendance records come next. You need tuition payment records, including deposits, ledgers, and late payment documentation. Subsidy reimbursement documentation must match the children and dates covered. Grant award letters and grant expense documentation should be organized by funding source. Payroll records require W-4s and timesheets. Vendor invoices need proof of payment. Bank statements need monthly reconciliations. State funding programs have their own documentation requirements that go beyond IRS standards. Pre-K Counts in Pennsylvania, First Steps in South Carolina, the DC Pay Equity Fund, and New Mexico’s programs each have their own rules. Schedule a consultation if you receive state funding and want a documentation system that survives a real audit.
How do I handle payroll correctly for teachers and aides and avoid IRS or state payroll problems?
Correct childcare payroll has several requirements. Employees must be properly classified. In nearly every case, teachers and aides are W-2 employees, not 1099 contractors. Timekeeping must be accurate. Withholding must be correct for federal income tax, Social Security, Medicare, federal and state unemployment, and any state-specific paid leave or disability insurance. Most childcare centers should use a dedicated payroll provider. Gusto, ADP, and Paychex are all reasonable choices. Running payroll manually or through a generalist bookkeeper is where most payroll problems start. The National Association for the Education of Young Children publishes guidance on staff compensation that’s useful context. Honest Buck does not run payroll directly. We believe specialty payroll providers do it better. We coordinate closely with whichever payroll provider our clients use. That ensures their books and tax filings reconcile correctly. Schedule a consultation if your payroll history includes back-tax notices or late filings.
What’s the right way to pay myself as the owner, and how much should I be taking out?
Owner compensation depends on entity type and IRS rules. S corporation owners must pay themselves reasonable compensation through payroll before taking distributions. The IRS scrutinizes underpaid S corp owners aggressively. LLC and sole proprietor owners take draws or distributions rather than salary. They pay self-employment tax on the full profit. A reasonable rule of thumb is this: owner compensation plus distributions should equal what you would have to pay someone else to do your job at the level you do it. Centers paying themselves less than that are subsidizing the business. Centers paying themselves more than the business can sustain are creating cash flow problems. Our guide on how to pay yourself as the owner of a childcare business walks through the calculation. Schedule a consultation if you’re not sure what reasonable looks like for your situation.
What do you charge, what’s included, and is it a flat monthly fee or hourly?
Honest Buck charges flat monthly fees for ongoing services. Our base package starts at $1,200 per month. It includes monthly bookkeeping, tax preparation for one business and one personal return, and ongoing advisory. Additional services are priced as add-ons. These include holding company accounting, additional locations, class tracking for multiple programs, additional tax returns, and audits. Multi-location operators typically invest $22,000 to $48,000 per year depending on complexity. Single-location centers typically run lower. Tax-only engagements are available for centers that handle their own bookkeeping. Schedule a consultation for an exact quote based on your situation.
Can you handle both my business and personal tax returns so everything is coordinated?
Yes. Most of our clients have their business and personal returns prepared by Honest Buck together. The coordination matters. Childcare business decisions affect personal tax outcomes. S corp distributions, owner health insurance, retirement contributions, and real estate held in personal name versus the business are all examples. Personal decisions also affect the business. Timing of major purchases, planning around income years, and estate planning all show up on both returns. The base package includes one business return and one personal return. Additional returns for spouses with separate income, adult children, or related entities are available as add-ons. Schedule a consultation if you’d like to discuss how a coordinated tax strategy might apply to your situation.
How can I lower my tax bill long-term, not just at filing time?
Long-term tax reduction in childcare comes from structural decisions made well before filing season. The big levers include entity structure choice and retirement plan selection. SEP IRAs, Solo 401k plans, and 412(e)(3) defined benefit plans each fit different owner situations. Real estate ownership strategy matters. Cost segregation studies on owned buildings produce significant first-year savings. Accountable plans let S corporation owners reimburse business expenses tax-free. The Augusta Rule allows renting your home to your business for up to 14 days per year, tax-free. Equipment purchase timing affects depreciation. Our childcare accounting FAQ touches on several of these. The actual planning happens in advisory conversations throughout the year. Schedule a consultation to discuss which specific moves would apply to your center.
Do you work only with childcare centers, and how many centers like mine do you serve?
Yes. Honest Buck works exclusively with childcare centers, preschools, daycares, and non-profit early childhood education schools. Our entire childcare accounting FAQ reflects that focus. We have specialized in childcare since 2013. The exact number of centers we serve fluctuates. Our client mix includes single-location operators, multi-location operators with up to dozens of sites, non-profit centers, Head Start grantees, and PreK funding recipients. Our audit team has specialty experience with state-funded centers. The four audit specialty regions are New Mexico, South Carolina, Washington DC, and the Philadelphia area. To see how we compare to other accounting firms serving childcare, our best accounting services for childcare centers comparison walks through the landscape honestly. Schedule a consultation to find out whether we’re the right fit for your center.
Can you help me budget and forecast so I know if I can afford to hire staff, raise wages, or open a second location?
Yes. Budgeting, forecasting, and scenario modeling are central to our advisory work. A typical advisory engagement includes three components. First, a monthly budget versus actual review. Second, a rolling 12-month cash flow forecast. Third, ad hoc scenario modeling for big decisions. The scenarios we model most often include adding a classroom, raising wages across the board, opening a second location, or purchasing your building. Our comprehensive guide to running a profitable childcare center covers the framework we use. Schedule a consultation if you have a specific decision on the horizon and want to model it before you commit.
How can we automate billing and parent payments so tuition collection is smoother?
Most childcare billing automation runs through childcare management software. Brightwheel, Playground, Procare, and similar platforms handle tuition invoicing, payment processing, late fees, and parent ledgers. The right platform depends on your size, program mix, and what other systems you run. Honest Buck helps clients choose the right platform. Then we set up the chart of accounts and reconciliation flow between the management software and QuickBooks Online. Our team designs a billing process that reduces late payments. The same process recovers the revenue most centers leak between enrollment and the bank. Our complete guide to auditing your center’s billing walks through the recovery process. Schedule a consultation to discuss your specific billing setup.
What should I do differently to be ready if the state, a grantor, or the IRS asks for financials?
Of every topic in our childcare accounting FAQ, this is the one that catches owners off guard most often. Audit readiness comes down to three things. First, clean, reconciled monthly financials produced on a predictable schedule. Second, documentation organized to match the requestor’s framework. The IRS wants different documentation than a state pre-K program. State programs want different documentation than a Head Start funder. Third, a CPA who can speak credibly to the financials in front of an examiner. Centers that wait until they receive an audit notice to organize their books spend significantly more on the audit response. Year-round audit-ready records cost less than reactive cleanup. Schedule a consultation if you receive state funding or federal grants, or if you have any reason to expect audit attention.
How often will we meet, and will you proactively tell me what I should change in my business?
Advisory clients meet with their lead advisor at least quarterly. Many meet monthly during high-activity periods. The typical high-activity windows are budget season, tax planning windows, and major decision points. Between meetings, your advisor reviews your monthly financials. We proactively flag items worth discussing. That might be margin compression in one classroom. It might be a cash flow concern based on seasonality. It might be a tax planning opportunity that needs action before year end. We don’t wait for clients to ask the right question. Schedule a consultation to discuss what an advisory cadence would look like for your center.
Have a question we didn’t cover in this childcare accounting FAQ? Schedule a consultation and we’ll answer it directly. We don’t take every childcare center that approaches us. The consultation is deliberately a fit conversation, not a sales pitch.