We are Scaled tax and Accounting, and one of our favorite types of clients are home childcare businesses or in-home daycares. I want to share 5 things you should know as a home daycare provider that will help you reduce your taxes, build tax efficient wealth, find the biggest tax write offs and help you keep more of your money.
One of the biggest challenges for the in-home businesses is that only "pro-active" tax planning creates meaningful changes in your taxes.
What I'm going to talk about here are tax reduction strategies that could reduce your taxes drastically.
For example - we've reduced the self employment taxes for many folks that make maybe $80k to $180k a year.
We often find $6,000 a year in tax savings with our new child care businesses.
You can drastically reduce your taxes with pro-active strategies
Most of my in-home childcare clients share with me a similar perspective.
The reward comes from the satisfaction of knowing that you are providing quality care to families who need your services, while being able to earn an income from the comfort of your own home.
You love the children you care for, and probably can't imagine your days without the hustle and bustle of running your family center. It’s something about all the chitter-chatter, the smiling youngsters, and even the mess that they make, that makes you feel like you're doing the right thing.
At the same time, operating a family center is very much a business and like any business, it has its stresses. Family child care taxes are stressful and drastically affect your bottom line.
Some daycare providers forget to focus on the business side and neglect their business needs. One of the most stressful business matters is taxes.
Taxes are one of, if not the biggest expense, you will ever have in your business. But no one likes to talk about taxes - for many reasons. Let’s be honest, taxes aren't the most exciting topic of discussion. And no one wants to think about the fact that Uncle Sam is going to come and take part of their hard earned money.
But what if I told you that there are ways to save in taxes and pay less to Uncle Sam?
Would that spark some excitement?
As a home daycare provider there are many tax savings opportunities available to you. However, the IRS is not going to send you a booklet or upload a Youtube video telling you what to do if you want to reduce your tax bill. But I am!
Here are 5 Tax Hacks For In Home or Family Daycare Providers that’ll save you money on your next tax bill.
There’s no doubt that you need lots of toys, games, puzzles, arts and crafts supplies and much more to keep little ones busy throughout the day. Children seem to go through more paper and crayons than we can keep up with. You should be monitoring and tracking all of these purchases to ensure that you are able to claim as many business expenses as possible.
The IRS says you can deduct any expense that is ordinary and necessary for your business. These expenses would include all of the toys and activities you buy, food, cleaning supplies, toiletries for the children, and any office supplies and equipment. Here’s a quick list of some of the purchases you want to monitor and keep record of.
Larger purchases such as computers and jungle gyms may need to be depreciated as opposed to expensed. This means you will deduct their value overtime instead of deducting it in one year.
Meal Deduction Methods
If you provide meals to your children, then that is a business expense as well. You should be tracking and keeping record of all of the meals you provide to each child. There are two methods of the deducting meal expenses:
The actual expense method requires you to keep track of all the costs you incurred providing meals and snacks to the children. You must keep adequate records of these expenses, and be sure to not mix them with any expenses for your personal or family meals.
The standard rate method is a simpler process because it doesn't require as much record-keeping. The IRS has set a flat rate for each meal: breakfast, lunch, dinner, snacks. You will multiply the given rate by the number of meals provided and that will be the amount of your deduction for that particular child.
In order to monitor and track all of your supply expenses, we recommend you do two things:
Taking these two steps will ensure that you do not miss out on any expense deductions and it will make tax time much less stressful.
As a family day care provider you use part of your home to provide childcare services. Therefore, you should be utilizing the home office deduction.
When it comes to the home office deduction, most businesses are under strict guidance from the IRS. However the IRS has given some leeway to in-home daycare providers regarding the home office deduction. They've relaxed the rules for you, which is great!
Generally, you can only deduct expenses that are related to the portion of your home used both exclusively and regularly for business. But as a family child care provider you can also deduct expenses for parts of your home that are both for business and personal use as long as you are providing care to children and licensed under your state.
There are two methods to utilize the home office deduction:
The simplified method is the "go to" for many home daycare providers. Simply because it's a much more simple calculation and it doesn't require the best record keeping. When you use the simplified method you simply multiply the square footage of the portion of your home used for business by the IRS's prescribed rate, which is $5 in 2021. The outcome is the amount of deduction you can take. The example below demonstrates this simplified method for a daycare run out of a homeowner's basement.
On the other hand, the standard method requires much more record-keeping because this method entails deducting actual expenses.
The standard method allows you to deduct the business portion for expenses such as your mortgage interest, rent, property taxes, maintenance, insurance, utilities, repairs, security systems, and even depreciation. Therefore, typically this method leads to more savings.
While on the topic of the home office deduction, we must mention that any repairs, improvements, or renovations you do to your home daycare space are also tax-deductible. The nature of the improvement will determine if the expense can be written off in 1 year, or if it needs to be included in the depreciation schedule and written off over a number of years.
Most family child care providers are operating as single member LLC's. As an LLC you are by default being taxed as a sole proprietor. Therefore, you are filing a Schedule C and attaching it to your form 1040. But there is a powerful tax saving strategy known as the S-Corp election.
If you are netting $45,000 and beyond, consider being taxed as an S-Corporation. An S-Corporation will save you tax dollars because it will save you in self-employment taxes. Here’s how it works.
As an S-Corporation your net income will be split into 2 parts. The first part will be a reasonable salary that you pay to yourself for the work that you do in your business. The second would be a pass through dividend that you will give to yourself as the business owner or investor. There are no self-employment taxes on the pass-through portion of your income. So, this strategy alone can save you thousands in taxes.
One of the things that self-employed and small business owners often forget about or overlook is retirement savings. Saving for retirement not only secures your future, but can also be a powerful tax-saving strategy.
There are many retirement planning opportunities for family child care providers; even those without any employees. The type of retirement account you choose will weigh heavily on how much you can or plan to contribute on a yearly basis and if you are the only individual within your business looking to contribute.
You may want to consider a Roth, Solo 401k, or a Simple IRA. The amounts that you contribute to a retirement account will lower your taxable income and ultimately reduce your tax liability.
Please don’t be like many small business owners who show up everyday, caring for children and neglect planning for retirement. You don’t want to reach retirement age, look around, and realize that you’ve saved nothing & can’t sustain your lifestyle. Plan early, plan now!
Like retirement, medical expenses and insurance are another neglected area for the self-employed or small business owner. An HSA or health savings account is a medical account that you can set up to pay for medical expenses and get a tax deduction for.
The main requirement for setting up an HSA is that you must have a high-deductible health insurance plan.
Any funds that you put into an HSA will result in tax savings. Anytime you use your HSA funds for medical expenses (some over the counter drugs included) you will not pay any taxes on it. Once you reach Retirement age you can withdraw funds from an HSA and use it for anything you want. So, an HSA also serves as a secret retirement account.
All in all there are many opportunities for family child care providers, including you, to reduce their taxes. The road to tax savings doesn't have to be difficult. It starts with learning and knowing your options, then devising and implementing a plan.
If you have the patience, energy, and drive to care for small children. Then you can handle your taxes with no problem!