Tax Tips for In-Home Daycare

Tax Tips for In-Home Daycare Providers

You have made the decision to take on one of the most challenging activities—becoming a daycare provider. Whether you care for one child, or several, it’s important to keep in mind that you are operating a business and you should keep accurate income and expense records. You can operate your business as a sole proprietorship, partnership, corporation, or limited liability company (LLC).

Before you begin operating as a daycare provider, you must investigate the licensing requirements. Not all states require licensing or registration of daycare providers. Some states will require that you obtain a license if you care for a certain number of children. You must contact your state licensing authority and find out whether they require you to have a license. Whether they do or not, your business deductions are the same.

All the fees you collect for providing daycare services are reported as taxable income. If you are operating your business as a sole proprietor or partnership, the IRS also requires you to pay self-employment tax on your income. If you operate your business as a corporation, you are an employee of that corporation and should pay yourself a reasonable wage for the services you provide.

There are several different types of expenses that relate to a daycare business that are deductible. Keep in mind that the IRS allows you to deduct all ordinary and necessary expenses incurred in conducting this activity. Some of the more common expenses are:

• Advertising
• Insurance
• Office supplies
• Legal and professional fees
• Licensing or registration fees
• Toys
• Clothing
• Diapers
• Automobile expenses. You may either deduct your actual expenses for operating your vehicle for business purposes, or you may use the standard mileage rate. For 2007, the standard mileage rate is 48.5 cents per mile. The rate increases to 50.5 cents per mile in 2008.
• Education and training expenses to maintain or improve your skills
• Special equipment such as highchairs, cribs, strollers, first aid kits, etc.
• Food – either actual costs of the meals you provide or a standard rate (see table)

2007 2008

Breakfast $1.06 $1.11

Lunch/Dinner $1.97 $2.06

Snack $0.58 $0.61

As a daycare provider, you may be eligible to participate in a food program administered by the Department of Agriculture. These reimbursements are taxable to the extent they exceed your food costs. If your food costs are more than your reimbursements, the difference is a deductible expense. As with all expenses, if you are reimbursed, you must reduce your deductible costs by the reimbursement.

Your customers may ask you to provide them with your social security number or, if you have employees, your federal employer identification number. This will enable them to claim the child and dependent care credit on their tax return for the amounts they pay you. They should provide you with Form W-10, Dependent Care Provider’s Identification and Certification, for you to complete.

As with any small business, keeping accurate records is a must. Maintaining your income and expenses on a monthly basis will make filing your tax return easier once tax time arrives.