A family child care provider writes:

> I have a daycare in Southern California and I have a family that went through financial hardship and wasn't able to pay their bill. This was back in March and I am no longer able to contact them with the info they gave me. Their bill is over $600. Am I able to write this off as a loss on my taxes? If so, how do I go about it? I would greatly appreciate any help you can give me!!

Unfortunately, I think this will be a common question this year.

Posted on 2012-01-18 15:30:27

This colorful two-page document highlights the most important record keeping chores for child care providers and contains tips to prepare you for tax time, help you pay the lowest tax, and avoid audit problems. It also provides the current auto mileage and meal rates.

Child care providers and organizations are welcome to download either or both of the Day Care 101 versions shown below. The printer-ready file can be used to print a single copy or generate multiple hard copies as handouts.

Posted on 2012-01-11 13:27:26

People often want to know how long they should store old tax returns and other tax documentation. I recommend saving W-2 wage forms and copies of all your income tax returns indefinitely, or as long as you can. I keep documentation supporting annual income and deductible expenses until the audit time window has passed. After that, I wait an additional year, before I consider tossing receipts, cancelled checks, bank/credit card statements, etc.

The Internal Revenue Service has three years to audit an income tax return. The three years are counted from the filing deadline (normally April 15) or the date you actually filed the tax return, whichever is later. I recommend counting from April 30, because many years the filing deadline is actually one or more days after April 15.

The California Franchise Tax Board has fours years to audit an income tax return. Taxpayers in other states should check with their state authorities.

Note that documentation supporting certain assets should be held longer....until well after the asset is disposed of and the transaction has been reported.

Read more for the specific recommendations I give my California tax clients.

Posted on 2011-12-07 21:46:53

A household employer writes:

>I LOVE your website. But I have a question for you that is about a household employee rather than a family child care business. I am hoping you can provide guidance anyway. My husband and I want to give our long time childcare provider a gift of money, but our accountant says that she (our employee) has to pay taxes on that money, just as she does on her wages. Which means I can hand a stranger $13,000 a year with no tax liability to him, but I can't give it to a beloved friend, who happens to take care of our disabled son??? Is there any way to "gift" her money?? Please advise!

Your accountant is correct. When employees receive cash gifts or bonuses the income is taxable to them. Such payments are treated as part of their wages.

Similarly, child care providers and other business owners must treat any cash gifts received from customers as additional business income. Even gift cards are considered taxable income.

Posted on 2011-11-29 17:49:48

I have previously written about the Board of Equalization (BOE) collecting use tax from California businesses with gross income of $100,000 or more through their Qualified Purchaser Program. Today I learned that the BOE may be pursuing use tax audits of businesses with incomes below $100,000, including child care providers. I cannot confirm this, but.....

California use tax rules apply to all individuals and businesses in the state. In the current climate, with the state grasping for additional revenue, I recommend that all California residents take steps to comply with the law. This goes double for family child care providers and other business owners, because current BOE enforcement efforts are directed at the business community.

Posted on 2011-10-25 21:21:45

A family child care provider writes:

> I have a question regarding my health cares expenses. I pay premiums for Kaiser health coverage, but that does not cover chiropractor care, which I pay from my pocket. Can I deduct that from my income tax, as well as the premiums?

As a self-employed person, your health insurance premiums are deductible on the front of your federal income tax return as an adjustment to income. This is called the self-employed health insurance deduction, which you'll find on line 29 of the 2010 Form 1040.

You do have to meet a couple of tests first, however.

Posted on 2011-10-13 00:46:14

October 11, 2011

Lately, I am again receiving IRS scam emails. Remember, the Internal Revenue Service will NEVER send you an unexpected email about your taxes or a refund. Listen to this 30 second IRS Tax Scam Video.

If you receive one of these malicious emails do not click on the links in these messages. If you've done that already, have your computer checked for viruses, even if you don't notice any problems. You could end up with a keystroke logger running in the background and recording your bank account passwords, etc.

Posted on 2011-10-11 13:13:58

A family child care provider writes:

> One of my employees recently got married but wants to keep all the info on her W-4 form the same since they will be doing taxes separately. Is there anything I need to do? Does she need to fill another W-4?

Glad you asked! This issue confuses a lot of people.

Posted on 2011-10-09 15:44:17

If you are a home-owning child care provider, you are allowed to calculate home depreciation and deduct it as a business expense on Form 8829 (the business use of home form). You should always deduct home depreciation, because even if you don't, the IRS will assume that you did. When you sell your home, you may be taxed on the amount of your “allowed or allowable” home depreciation. This is called “depreciation recapture.” Even if you never deducted home depreciation on your tax return, you may still have to pay the depreciation recapture tax when you sell. The only exception is if you sell your home for less than its "tax basis," which is generally the original purchase price, plus the cost of improvements, minus allowable depreciation...whether you actually deducted the depreciation or not.

I frequently meet with new clients who have been in business for several years and never deducted any home depreciation. Or sometimes they deducted the wrong amount of depreciation, either because of using the wrong building value for their home or figuring their time/space percentage incorrectly in Part I of Form 8829. If you find yourself in either situation, you can do one of two things.

Posted on 2011-10-05 20:48:59

Before setting up an LLC, I recommend that you consider your options carefully and read Tom Copeland's article entitled Should You Set Up a Limited Liability Company (LLC)?. You may not get as much liability protection as you expect.

For income tax purposes an LLC will function as either a sole proprietorship (if there in only one member), a partnership, or as a corporation. The single-member LLC adds the least amount of cost and complication to the business, so that is what I encourage for child care providers who really want their business to function as a Limited Liability Company. Most child care providers are sole proprietors and certain things, like home expenses, are geared to be reported on an individual's tax return, rather than on a business entity tax return.

Posted on 2011-09-26 18:02:34

To preserve your sanity and your tax deductions, you must have a good record keeping system. Any system will do, so long as it works for you. Take the time to process your receipts every week, every two weeks, or at least monthly. Don't leave it all to the end of the year when the task will be overwhelming and you may not even remember what you purchased. Careful tracking of your expenses will help to keep your taxes as low as possible. Even if you haven't started caring for children yet, keep track of the costs involved in getting your business started.

Posted on 2011-09-17 18:16:30

A family child care provider writes:

> I am taking some classes to work toward a teacher's certification and possibly an AA degree. Are the hours I spend in school or studying able to count toward my total work hours when calculating my time/space percentage? Can I deduct the cost of tuition and books as a business expense?

Hours you spend at school, or otherwise away from home, don't count. Hours spent at home studying or doing homework may count, but only if the education cost qualifies as a business expense. Figuring that out is actually pretty complicated. I recommend you read Tom Copeland article entitled When Are Education Costs Deductible?

Posted on 2011-09-15 00:21:05

A family child care provider writes:

> Please tell me what part of my cable/internet/phone bill can be deducted??

This is actually kind of complicated. The simple answer is that you can deduct the business portion of your cable/internet/phone service bill. But how do you figure that out?

I believe it is reasonable to use your time/space percentage to figure the business deduction for communications services. If you feel that your actual business usage is higher than that, however, you can use a higher percentage. Documenting higher usage (and possibly having to prove it to an auditor) can be a real pain, however, and often it's not worth the effort.

Posted on 2011-08-30 12:30:15

A family child care provider writes:

> I have two daughters (ages 14 and 16) who help me sometimes. What do I have to do to pay them some money and what forms do I need to fill up? Also how much will it cost me?

Since the only helpers you have are your daughters who work for you part-time, you have choice. One option is to treat them as employees, which means paying them an hourly wage, submitting federal and state payroll tax returns, and giving them each a Form W-2 at the end of the year. Because your daughters are both under 18, however, I don't expect you to owe any actual payroll taxes. No taxes will be withheld from your daughter's paychecks, either, unless they are paid enough to trigger some income tax withholding.

Alternatively, you can decide NOT to hire your daughters and help them out with occasional gifts, instead. This approach is explained in an article from Tom Copeland's Taking Care of Business blog.

Posted on 2011-08-28 23:41:52

The fiance of a family child care provider writes:

> My fiancee is using our home as a home day care. She is not listed on the mortgage and I am not listed under the day care. Would either of us be able to use the Time x Area deduction on our taxes? If not, what needs to be done to do so? Would she need to be added to the mortgage? (Not the best option as the home is currently underwater in value.) Or do I need to be listed as part owner of the daycare?

This is a common situation for unmarried couples. Once your wedding day comes, it shouldn't be an issue.

In the meantime, the first thing to know is that your fiancee cannot treat any expense as a business deduction unless she pays the cost herself. That is the main issue. She cannot deduct something you pay for.

Posted on 2011-08-28 22:56:55

A family child care provider writes:

> I am paying my incoming part-time assistants $8.00 per hour. What extra expenses do I add? This is a big cut on my income to have helpers. I'm willing to use your payroll service, but I hesitate to sign up without knowing the whole cost. I just want to make sure first how much I'm going to spend if I have somebody with me. Also, my assistants are asking me, how much will be their take home pay (after taxes)?

You are asking good questions. As you say, it is a big cut in your income to hire an assistant, so it's best to have an idea of the cost ahead of time.

Please read the rest of this article. You will see that the wages you pay will be the major cost when it comes to hiring helpers. The taxes and other overhead costs do factor in, but not as much as you might think.

This should be good news for child care providers out there paying for help and incorrectly treating the worker as an independent contractor. The cost of converting to employee treatment is not that much, compared to the wages you are already paying...especially when compared to the risks of going the 1099-route.

Posted on 2011-08-18 19:15:40

A family child care provider asks:

> I would like to do some carpet replacement and painting this summer. How much is usually deductible?

When it comes to fixing up your home, you have to distinguish between repair and maintenance work versus improvements. Any major project (e.g. construction, new roof, new patio) or a brand new installation (e.g. water heater, dishwasher) is an improvement. Anything that fixes an existing installation (e.g. plumbing repairs, painting, replacement roof shingles) is considered a repair/maintenance expense.

The cost of repair and maintenance work is fully deductible on your income tax return. Improvements are subject to depreciation, which means the cost is deducted over a number of years. How many years depends on the item. Improvements to the structure of your home are deducted over a period 39 years. New appliances and carpeting are 7-year property in a home day care situation. (They are 5-year property in a residential rental.)

Posted on 2011-06-25 16:43:02

Summer is here and kids are having fun outside. Ever think about pesticide use on your property?

A friend in the know clued me in a long time ago that toxins in pesticides are extremely damaging to humans. This is because bugs and humans have similar nervous systems. Who knew?

According to the Pesticide Action Network North America: When it comes to pesticides, children are among the most vulnerable. Pound for pound, they drink 2.5 times more water, eat 3-4 times more food, and breathe 2 times more air. They therefore absorb a higher concentration of pesticides than do adults.

Kids also put more things in their mouths, often wear less clothing, and spend more time on the ground, according to The Bugman Richard Fagerlund in his Pesticide in the U.S. report.

If something must be done about an unpleasant infestation, look for least- toxic alternatives which are much safer for you, your family, and children in your care.

Posted on 2011-06-22 20:21:15

Does your California business bring in $100,000 or more in annual income? If so, this makes you a Qualified Purchaser under a new program from the State Board of Equalization (the BOE). I regularly see a few child care providers and other sole proprietors who have income (before expenses) at this level. If you are not sure, look to see how much income you reported on your Schedule C, Line 1.

Businesses falling into the Qualified Purchaser category are required to register with the BOE for the purpose of paying use tax, which is another flavor of sales tax. It has been on the books for a long time, but is only recently being enforced. You may owe use tax if you buy supplies online from out-of-state vendors. If such vendors don't collect California sales tax, it is up to you to pay the use tax directly to the state. The use tax rate is the same as your local sales tax rate.

If your business income is under $100,000, you don't have to register, but you are still required to track and pay California use tax.

Posted on 2011-06-13 22:50:07

A family child care provider writes:

> I am ready to hire someone for summer. However, the "employee" I am about to hire would like to offer his services as an independent contractor (1099). Do I just hand him the 1099-MISC and pay him weekly per contract? Is there something that needs to be withheld?

Here's the thing--it is not up to the worker to define whether the position offered is an employee position or an independent contractor position. That is defined by the nature of the work, where the work takes place, the amount of supervision, and other factors. I don't believe there's any way to categorize a child care worker as an independent contractor, unless they have specialized skills (story teller, tutor, etc.) and come onto the premises and perform their work with little direction from you.

Posted on 2011-06-13 18:54:26

A family child care provider writes:

>I came across your website when looking for answers to tax questions regarding my in-home child care. I am licensed to care for a total of 8 children. My two (2) children count against those numbers. Can I account for them as paying clients or as loss of income? All in all I would like to know how I can account for my own children in my home child care.

You cannot count your own children as paying clients. They are part of your program, but your own children do not factor into the business income or expenses. You will have lower income because they are taking up head count. That, by itself, will mean paying lower taxes. You cannot take any kind of deduction for the loss of income.

Posted on 2011-04-04 17:09:38

A family child care provider writes:

>I was referred by a friend to a tax preparer. She has a large daycare so I assumed he was knowledgeable about daycare taxes. I spoke with him today and I was quite shocked about what I owe in taxes. I started this business because my husband's income went down significantly with the economy. He only made about $36,000 last year. My income after write offs he claims to be around $30,000. I owe approximately $6,000 between fed and state. I want your opinion. Does this sound appropriate to you?

While I'm waiting for a tax return to print, I want to quickly reply to your message. $6,000 in taxes based on the income you describe does seem appropriate to me.

Posted on 2011-04-01 13:39:25

Many family child care providers are confronted with an unwelcome tax bill when filing their annual income tax return. Daycare business profits can ratchet your taxes up quickly, because you're paying both income tax and self-employment tax. Self-employment tax covers your contributions to social security and Medicare and comes to 14.13% of your profit. (See my Family Child Care Tax Return Overview handout for more information regarding how your income is taxed.) Your income tax rate will vary and will be higher if your spouse has some significant wages or other taxable income. On the other hand, married providers often have the advantage of tax withholding through their spouse's paycheck, which sometimes covers the family's entire tax bill.

Most child care providers with a profitable business need to make estimated tax payments of anywhere from a few hundred to several thousand dollars every quarter (4 times per year). As a self-employed person myself, I know how hard it is to write those checks! But if you don't make quarterly payments, you may soon find yourself in a vicious cycle of owing.....owing the taxes and owing penalties.

Posted on 2011-04-01 13:33:45

The husband of a family child care provider writes:

>I was reading past newsletters and in 2007 you discussed the necessity to have workers comp here in CA. Is that still the case and did you get any good responses from providers on where/cost of coverage? That is an area that my wife is lacking in with her business and it's gotten me worried.

Thanks for contacting me. Please refer to my updated web post covering workers' compensation insurance. The leads I have are listed at the end of the article. If your wife has a helper/employee, this is is certainly something to be concerned about.

It seems that liabilities loom in many areas and we all need protection for those rare disastrous situations. You need good child care-specific liability insurance (at least $1 million per occurrence/$2 million aggregate), workers' comp insurance, and (if your wife transports kids) commercial auto coverage.

Posted on 2011-02-16 00:17:07

A family child care provider writes:

>Help! I'm a licensed daycare provider in New York state. I have been running my business for 4 1/2 years. In 2009 I had a sub who was working for me and she was collecting unemployment from a prior job. She left to work for another daycare provider full time. Long story short, the state says I was an employer. Now I have unemployment, workmans' comp and disability coming after me. If I knew that I HAD TO run my business differently I would have. I'm VERY frustrated and I have a hearing coming up. I have been researching anything and everything that would help me. I found your site. I know at least 20 or so daycare providers that run their business this way (using Form 1099-MISC at the end of the year). I am writing for help or advice.

I am so sorry to hear what you are going through. This is the kind of worst case scenario that I envision when daycare workers are treated as independent contractors. Just like you, many daycare providers don't even know that it's necessary to treat assistants as bona fide employees. I constantly work on getting this message out. Proper employee paperwork is required when hiring child care helpers.

It is easy to be led astray by the 1099 crowd, but it's like our mothers always said:

Just because everyone is doing it, doesn't make it right.

Posted on 2011-01-31 23:10:49

In January, a family child care provider writes:

>I have been paying my daycare assistants as independent contractors, as that is what I was told to do when I started my home daycare. Now I see that I have been doing it all wrong. I read that it is possible to fix it if I do it soon, so I would like to know what I must do and how much it will all cost.

The cost will depend on how many months ago you started making payments and how much you've paid your assistants to-date. I will provide more detail below and describe what needs to happen to convert your assistants' payments to wages and provide them with W-2s.

I charge $125 per quarter to deal with payroll from prior periods, handling all the tax returns, tax payments and W-2 forms. If you had assistants from the beginning of last year, there are four quarters to deal with. I only do this kind of work for California child care providers who sign onto my payroll service going forward.

No matter what you decide about last year, I urge you to make it a priority to get payroll set up for the current year. Do it before you face unwelcome consequences. This is a no-brainer, in my book. If you act now to pay your employees properly going forward, you will avoid facing this issue again next year.

Posted on 2011-01-25 00:06:01

>My husband and I each participated in our employers' DDCFSA plans last year for a total amount of $5000 and this year we are solely into his plan for $5000. With last year's plans, both forms stated that we did not need the babysitters SSN or Tax ID. We switched to an in-home provider midway through the year and never submitted any of this info. She just signed the forms and we were reimbursed. With this years plan, the form says that we need to include the SSN or Tax ID. What is the rule for this? Is our provider required to submit this information and are we required to do anything else? The care is provided in her home while I am at work. I don't want to have to pay any additional money that we weren't counting on, and I don't know if she was plannning on claming the income on her taxes and if now we will be "in trouble" after the fact. Thank you in advance for any help.

Posted on 2011-01-20 20:43:24

California child care employers:

Did you know that California labor law requires that day care workers be paid at least twice per month? You can provide paychecks more often than that (weekly, for example), but not less than two times in every month.

Posted on 2010-12-07 12:13:50

A family child care provider writes:

>We bought a home that qualified for the First-Time Homebuyer Credit. A year into living in our home, we started a Registered Home Daycare. We just received, from the IRS, a "Courtesy message about your First-Time Homebuyer Credit" that states: *The following examples are situations when a home is no longer considered a primary residence and the credit must be paid back: The home has been converted for rental or business use. Does running a daycare disqualify us?? Any thoughts would be greatly appreciated.

This is not the first time I have been asked about this. Clearly information coming from the IRS is causing concern.

Posted on 2010-11-30 21:43:34

On September 27, 2010, President Obama signed into law the Small Business Jobs Act. Among other things, this act extends bonus depreciation to 2010 business purchases. Bonus depreciation is also allowed for 2008 and 2009.

Posted on 2010-11-04 16:19:03

New clients will need to get organized early. You'll need to come in for an office appointment or deliver your organized tax records into my hands no later than Saturday, March 3, 2012.

If your tax information is provided by the date shown above, your tax return should be completed before the filing deadline. However, it is sometimes necessary to place tax returns on extension and file them after April 15. This is normally due to complex or time consuming tax issues, or because missing information is provided too late to complete your tax return before the April deadline. The extended filing deadline is October 15.

PLEASE BE AWARE OF THIS DEADLINE: If your tax return is placed on extension, I will normally have the work completed by August or September. Any missing information must be provided no later than August 6, 2012. If critical information is still missing as of that date, it will most likely be necessary to cancel our engagement for 2011 tax preparation and you will need to seek help elsewhere. Should this come to pass, your nonrefundable tax preparation deposit cannot be returned.

If you are a California family child care provider looking for help preparing your 2011 income tax return, please read the information in this article and take the recommended actions.

Posted on 2010-09-20 17:02:03

If you lose your house in foreclosure, there may be some tax consequences. If you were personally liable for the debt, you must report a sale for the lesser of the debt outstanding or the fair market value (FMV) on the date of foreclosure. If you were not personally liable, the sales price equals the debt outstanding. Up to $250,000 ($500,000 on a joint return) of any gain on the sale may be excluded if you owned and used the home as your principal residence for at least two out of five years ending on the date of the foreclosure. Any loss on the sale is a nondeductible personal loss.

Posted on 2010-09-07 13:27:14

This article is for California child care providers (and other small business owners) who have visited our Family Child Care Payroll Service page and are ready to sign up for service.

It's best to get your payroll account set up as soon as you know that you will be hiring. If you already have someone working for you, however, it is still possible to catch up on the required paperwork and give your employee(s) a Form W-2 for the year.

Please note that you must have Internet access to use our payroll service. We will set up an online payroll account for you. You will need to log into your account before every payday to enter employee hours. Paycheck stubs will be sent to you via email.

To start giving your workers proper paychecks, please follow the indicated steps and then call us at 800-616-1268.

Call or email if you have any questions.

Posted on 2010-09-06 23:10:09

A soon-to-be-babysitter writes:

> My sister-in-law, who is becoming a mom, has asked me to provide child care for her at her home! However, she wants to be able to write off the child care in her taxes. We made an agreement of monthly pay, but are not quite sure on how to avoid any problems with taxes! How do I make her write off possible without hurting myself in my taxes?

There really is no way for your sister-in-law to claim the Credit for Child and Dependent Care Expenses unless you report the income on your income tax return. This is because your name, address, social security number, and the amount she paid you will appear on Form 2441.

Posted on 2010-08-23 18:04:04

A child care provider writes:

> I'm looking at my Form 1040, federal income tax return. Why is my adjusted gross income (line 37) only $16,273 when the gross income on my business Schedule C line 7 is $52,826? Shouldn't the adjusted gross income be almost same amount? Why is it so low? I make more than $16k.

The adjusted gross income on the front of your Form 1040 is only about $16,000 because you are taxed on "net" business income, not gross income.

Posted on 2010-08-02 00:49:43

How much will it cost to hire a child care assistant? You can pretty easily estimate the amount of wages, but what about payroll taxes, insurance, etc.?

This article looks at the cost for a California family child care provider with one full-time employee. Her total cost includes wages of $20,800, employer taxes of $1,892 (a little less than 10% of wages), a workers' compensation insurance premium of $1,000-$2,000, and payroll service costs of $600*-$1,500. (*Our Family Child Care Payroll Service is a low cost option for California providers.)

This child care provider's annual cost for a full time helper comes to between $24,292 and $26,192.

For a provider with two part-time helpers, another posting on this page shows an annual cost of between $15,600 and $17,500.

Many day care providers are under the impression that it's okay to give a 1099-MISC to helpers. Some tax preparers even encourage this practice, but this is bad advice. Typical daycare business helpers must be treated as employees and provided with a Form W-2 at the end of the year, even those working minimal hours.

All of the costs associated with hiring a worker are 100% tax deductible as a business expense.

Posted on 2010-07-27 16:15:26

A legal secretary writes:

>I am presently employed as a legal secretary. I work for an outstanding firm....they treat their employees well, but.......I am just so very tired of "being at work" all day long....My point is, I am seriously planning on doing home day care. I actually went through the process of obtaining a daycare license about 6 years ago, but, at that point, I decided to postpone my plan. So here I am again, planning....

Posted on 2010-07-15 12:53:08

A family child care provider writes:

> My daughter and her husband live with me rent free in exchange for my daughter acting as my helper in my large family daycare. I would not consider her an employee in this case, but do not know what the law states. Do I need to establish workers comp for her even if I do not pay her?

Posted on 2010-06-04 16:06:35

I recommend that all providers participate in the Child and Adult Care Food Program sponsored by the U.S. Department of Agriculture (USDA). This federal program reimburses eligible providers monthly for serving nutritious food. The USDA provides both Tier I and Tier II reimbursement rates. Tier I will apply to low income child care providers. If you currently receive the Tier II Food Program reimbursement rate, you can still take an income tax deduction based on the higher Tier I rates.

The Food Program offers a good source of income and improves the nutritional health of children. If you hesitate because food program reimbursements are generally taxable**, remember that all of your day care business income is taxable! You still want all the income you can get, don't you?

For another perspective, here are Tom Copeland's Three Most Common Objections to the Food Program, plus his version of how and why to join.

Posted on 2010-06-01 18:29:38

A family child care provider writes:

> I have some questions about the possibility of expanding my existing business and wondered if you could advise me on the tax implications. I am contemplating purchasing another house and having my current teacher live in the house we currently own. The idea is that she would get a large license and meet the requirements to run the program we have currently established. We would hire an assistant to work with her and all state and city requirements would be met. I would then work to establish a second location at the newly purchased residence.

Under this scenario, can I pay my current teacher for her teaching skills and have my business pay the mortgage, utilities and all other operating expenses? Can my business then deduct all the home-related expenses based on the time/space percentage for the established location, as well as separately deducting such expenses based on the time/space percentage at the new location? Would it be in my best interest to establish a corporation to operate both households, rather than continuing as a sole proprietor?

You ask good questions. I have heard variations of this idea from other providers and it does present some difficult tax issues.

Posted on 2010-05-20 19:16:49

A family child care provider writes:

> I have a question regarding payroll. I want to hire a gal, but need to know how to go about figuring out if I can actually afford to hire her. She has needs wages of $500 per week. I know that my out-of-pocket expenses will be more than that, because of payroll taxes, etc. Is there a site or formula or calculator somewhere that I can figure out a close estimate to see what my weekly total expense may be, if I hire her?

Posted on 2010-04-19 22:36:15

The recently passed Federal Hiring Incentives to Restore Employment (HIRE) Act lets employers skip their 6.2% contribution to social security for previously unemployed workers who begin employment after February 3, 2010 and before January 1, 2011. The employer's portion of social security taxes is forgiven for wages paid from March 19, 2010 through December 31, 2010.

Posted on 2010-04-19 22:09:28

A child care provider writes:

> I have been doing home daycare for 8 years and I'm 29 years old! I am having problems trying to get a loan in my own name. I always have to have a co-signer and it's really getting old. I ask the banks why and it's always because of my debt-to-income ratio. My credit score is great. I'm at 738 right now, but the banks won't look at my income before deductions. My tax accoutant can't believe I'm having such a hard time. So say I make about $40,000. I own my own home. I have all the deductions with that, along with my daycare expenses, so say I have about $25,000 in deductions & expenses. (I'm not sure how much exactly it was, but last year my income was only $18,000 after deductions.) How do I go about proving my income before deductions? I've been told to set up a business bank account and write myself paychecks to show the bank to prove my income, but then my tax accountant says I will then pay more in taxes? I need advice, Please!

I don't think I'm going to be much help. It appears that you are at the mercy of the banks.

Posted on 2010-03-13 23:51:10

A child care provider writes:

> Do I need to add up how much I spent on personal food for last year?

You do not need to add up the amount spent on food for yourself and your family, but there remains the question of whether you should save your personal grocery receipts.

Posted on 2010-03-03 00:06:04

I had the opportunity to attend a 4C's of Alameda County child care tax workshop with Tom Copeland this past week.

It remains quite difficult for day care providers to find tax professionals who really understand their tax issues. Even very well trained and experienced CPAs, Enrolled Agents, and other tax preparers are quite unfamiliar with the particular rules that affect you. This can mean lost opportunities for deductions or mistakes that can really hurt you.

Here are some questions that Tom suggests you ask to gauge whether a tax preparer will handle your tax return correctly:

• Should I depreciate my home?
• Should I depreciate the household furnishings I owned at the time I started the business?
• Can I count the hours I work in my home when the day care children are not present?
• Is there a limit to the amount of such hours (when children are not present)?
• Can I claim an exclusive business-use room, as well as regular-use rooms? (Regular-use means space with both business and personal use.)

Here's a question that I would add:

• Will I receive copies of all the depreciation schedules with my copy of the completed tax return?

Posted on 2010-02-27 00:20:52

Family child care providers and other taxpayers with a home office beware:

There are certain tax preparers out there who may advise you not to depreciate your home, if you own it. They may have good intentions and be ill informed, or they may not want to do the work, but this is bad advice. I suggest that you find another preparer if you get this recommendation.

Home depreciation allows you to take a tax deduction based on the cost or value of the building portion your home (whichever was lower when you started your child care business). This is not optional. The IRS treats depreciation as "allowed or allowable," meaning that whether you take the deduction or not, they will assume that you did. Any improvements you do after the purchase of your home are also depreciated.

If you are a home-owning child care provider and you have previously filed tax returns without claiming home depreciation, you should look into going back and deducting the prior year depreciation now.

Posted on 2010-02-26 23:58:35

I want to give you an important tip:

Be sure that depreciation schedules are printed with the tax return copy you keep for your records. These schedules document current year depreciation and all prior year depreciation taken. They might be called depreciation "worksheets" or "detail" or something else. Just make sure that whatever you have shows information similar to what is included on my sample depreciation schedule.

If you have your tax return professionally prepared, be sure the preparer prints this information with your copy of the tax return. They are not required to provide depreciation schedules and many do not. Form 4562 will be attached to your tax return every time you start depreciating a new asset, but the prior year information will be lost without the depreciation schedule detail.

I recommend that you ask about depreciation schedules before you agree to work with a particular tax preparer. Find out if all the schedules (both for regular tax and Alternative Minimum Tax purposes--more on this later) will be included with your copy of the tax return. If not, find someone else to work with.

This is a strong suggestion, but having the depreciation schedules in your possession is very important and certain tax professionals consider them to be privileged work papers which they don't have to provide. Many others just don't print them out of habit or because they know it will be hard for you to switch preparers without them. Either way, you lose.

"Depreciation" is a big word that intimidates many taxpayers, but it's really a simple concept. Read on for further explanation.

Posted on 2010-02-25 00:14:48

In a follow-up to her previous question regarding outdoor space, the child care provider continues:

> Thank you for answering my question about yard space so quickly. Your answer does make sense. Now my question is about deducting utilities...the kids use lots of water outside (water tables, water fights, etc) a good 6 months out of the year, so I feel that that would deduct as a business expense? How does that factor in if the formula for utilities is only based off of the actual space used in the house? On a side note: I passed your answer about square footage along to my friends in child care who do count yard space in their time/space formula. One of my friends said her accountant actually came out and measured her house, backyard, and front drive for her taxes?? He said that it was because during business hours that space is used by the kids and parents?

You are not required to use your time/space percentage for all of your shared expenses, if that percentage does not accurately reflect actual business use. I have another client who says that a much greater percentage of her total water usage goes to child care activities than would be allowed with the time/space percentage. She came up with another percentage and you can do that, too, but you must have some documentation to back it up.

Posted on 2010-02-23 00:10:37

A child care provider writes:

> In your child care tax return checklist and packet it says to take home space measurements, NOT outside measurements. Everyone I know in child care measures and deducts based on both inside and outside space used for child care. I was wondering why you do not ask for the outside information? We have a large backyard with a nice play structure, sandbox, water tables, patio area, etc., and the kids use that outside space just as much as the indoor space. It seems such waste to not ask to claim that space for child care. Just wondering why you do not deduct it???? Please let me know if I am misunderstanding something.

This is a fairly common misunderstanding. The space measurements are used to calculate your time/space percentage. This percentage determines how much of your home expenses, such as rent or mortgage interest, utilities, building depreciation, etc., you can deduct as a business expense. It is meant to indicate the percentage of your home that is used for business purposes and that means the structure only. Yard space does not affect your time/space percentage.

Posted on 2010-02-21 19:55:54

A child care provider writes:

> I have a few volunteers in which I would like to give them thank you gifts through the year to say thank you for helping me in my childcare. I was wondering if there is a limit to doing this and where I would put it under expenses.

This is a potentially thorny issue. The trouble with giving these folks gifts, is that it could be interpreted as wages. This is because they are doing employee work for free and when employers give gifts to employees (cash or otherwise), it is considered taxable compensation.

Posted on 2010-02-19 16:23:24

First a caveat: I work with family child care providers and this article concerns parents hiring babysitters in their homes. Such folks are "household employers." Day care providers are NOT household employers. Though they work out of their homes, they are business owners and are categorized as "commercial employers." Family child care providers can find employment tax guidance in my Payroll Tax Guide article.

A parent writes:

> I am getting different opinions on my situation from tax companies. Is there anyway you can help. I have a college girl come in my house and she watches my son for about 3 hours a day. However she is not in school right now and doesn't have any other job. To be honest I just wanted to do it under the table, but she is filing what she made, which was $3,800. Should I do a 1099, or do I make a W-2 for her? I am very confused. H&R block told me I had to get a federal id number and give her a w-2 and pay her Medicare and social security taxes. I am really overwhelmed right now with all this and just want to get it over with.

H & R Block is correct. You are a household employer. At least that's somewhat easier than being a regular employer. You can file a form with your regular income tax return to pay the federal payroll taxes.

Posted on 2010-02-18 00:54:06

Not many child care providers (nor many tax preparers) seem to know that when using meal rates to calculate your food deduction for income tax purposes, your choice will affect restaurant meals, as well as meals served at home.

Count the heads of daycare children when taking them out to eat if you are using the standard meal allowance rates to calculate your food deduction for meals served at home. In that case, you must also use the meal rates for day care children's meals eaten at restaurants. This has nothing to do with food program meal counts or reimbursements. This rule only affects your income tax return food deduction.

If you want to deduct the actual cost of kids' restaurant meals, then you must deduct the actual cost of groceries for at-home meals, too. Your choice can change from year to year, but for any given year, you must use either the meal rate method or the actual grocery cost method for both meals served at home and those eaten in restaurants.

Posted on 2010-02-07 22:54:32

A parent writes:

> My son's child care provider has refused to give me her tax id number. I have terminated care because I suspect she is commiting tax fraud. How do I get her number to claim on my taxes?

Give the child care provider an IRS Form W-10, Dependent Care Provider's Identification and Certification, which she is required by law to fill out and return to you. You can tell her that the penalty for not providing the information requested on the W-10 is $50.

Posted on 2010-02-05 13:26:18

A family child care provider writes:

> I am a family daycare provider. One of my clients has given me a 1099-Misc for 2009. I have never dealt with this before and am not sure if this is even legal. His wife worked 6 months last year but I had her son in my daycare all of last year and her daughter for 6 months. He is a contractor. It looks to me like he wants to write daycare off as a business expense. Is this legal?

The good news is that you do not have to be concerned with what your client might or might not be doing. Daycare is not generally a legitimate business expense, but it won't affect you, no matter what he does.

Posted on 2010-02-04 14:35:11

The business percentage on Line 7 of your Form 8829, Expenses for Business Use of Your Home, determines how much of your home (and other shared) expenses can be treated as a business tax deduction. It is often called the time/space percentage, because of the unique way the business percentage is calculated for family child care businesses, with a time component and a space component. Day care is very special this way! No other type of business qualifies to deduct home expenses when space is used for both business and personal purposes.

Your time/space percentage will be used to determine the business percentage of many expenses for income tax purposes. This can include such things as rent, mortgage interest, home repairs, property tax, utilities (gas, heating oil, electricity, phone service, water, sewer, cable tv, etc.), home insurance, home depreciation and improvements, furnishings, appliances, play equipment, toys, and household/cleaning supplies. I could go on! Boosting your time/space percentage can mean money in your pocket, because it affects so many shared (business/personal) products and services.

Note that instead of using the time/space percentage, you may allocate business use for shared items by calculating an actual business use percentage, but you must be able to document your calculation.

Posted on 2010-01-31 00:58:50

If you have a room in your home that you used all year for child care business purposes, and never for personal purposes, you will have a significantly higher business percentage on Line 7 of Form 8829, Expenses for Business Use of Your Home, as a result.

Posted on 2010-01-31 00:57:01

I just made an interesting observation regarding these new energy credits that will work to the disadvantage of family child care providers:

• The Nonbusiness Energy Property Credit - equal to 30% of the cost of certain qualifying improvements, up to a maximum of $1,500 (for 2009 and 2010 combined)
• The Residential Energy Efficient Property Credit - equal to 30% of other qualifying improvements, but it goes through 2016 and doesn't have the $1,500 cap

Both credits apply only to the taxpayer's main home and not to business property or rental real estate.

Here's the nasty bit from the Form 5695 instructions that will reduce these credits for most child care providers:

If less than 80% of the use of an item is for nonbusiness [meaning personal] purposes, only that portion of the costs that are allocable to the nonbusiness [personal] use can be used to determine the credits.

Put another way, if the business percentage for your home business is higher than 20%, you will not be able to take the maximum credits.

Posted on 2010-01-29 00:55:55

A child care provider writes:

> I have a friend who does daycare and has hired her mom and sister. They have both been working part-time since June, and she has been paying them both cash ($10hr). Last time she hired them her tax accountant said she could 1099 them. Is this because they are family members, or should she be paying payroll taxes? Any help would be appreciated. I told her I'm almost sure she should be taking out payroll taxes. If so, how does she correct this problem?

Thanks for contacting me. I don't know why an accountant would have recommended preparing 1099s for these workers. You are correct that they are employees and that payroll taxes apply.

There are some special rules for family employees which could apply to her mother (not her sister, though) and reduce the taxes somewhat, but payroll tax returns must still be filed and she needs to give her employees W-2s at tax time.

The time to get caught up on payroll paperwork is before the deadlines at the end of January and definitely before W-2s must be sent to the Social Security Administration at the end of February.

Because she hasn't withheld any taxes from the payments made to her helpers, this provider will have to pay both the employee and employer payroll taxes, unless she can get her mother and sister to pay back the amounts that should have been withheld for social security, Medicare and state disability insurance.

Posted on 2010-01-23 19:57:20

Family child care providers owe it to themselves to learn as much as possible about record-keeping and taxes, as well as other important business issues, such as contracts, policies, insurance, and legal issues. You are in the best position to look out for your own interests. My tax clients are important partners in the process of preparing an advantageous and accurate income tax return. To get the best result, we have to work together.

Your most valuable resources:

Publications from author Tom Copeland, along with his on-site and web-based training opportunities.

Visit Tom's Taking Care of Business Blog and get on his email list.

Posted on 2010-01-08 16:26:38

A daycare helper writes:

>I have come across your website and I must say I wish I saw this website about 1.5 yrs ago! I worked for a woman who has been employing her "helpers" as independent contractors. After reading your website I now know that she is in the wrong. My dilemma here is that she is my friend and I don't know how to tell her. My husband wants me to file the proper forms for being misclassified. I want to do what is right but I feel stuck between a rock and a hard place!

You say that you "worked" for this woman. Does that mean you are no longer working for her? If that's the case, I would probably call this a case of "water under bridge" and leave it alone. It's not like anything bad can happen to you by going along with the independent contractor classification. You pay somewhat higher taxes that way, but it could save your friendship.

Posted on 2010-01-03 15:05:29

Written by Tom Copeland for Resources for Child Caring, November 2008

All signs point to a coming recession in the US. This is bad news for everyone, including family child care providers.

When our economy slows down, parents are laid off work and often stay home to care for their children, thus reducing the demand for child care services. At the same time, some of these parents will start offering child care in their own homes to earn more income for their families. The supply of child care increases while the demand for care decreases, making it difficult for providers to fill their spaces.

I've been hearing from providers across the country who are losing parents from their programs. Economists expect that unemployment will continue to rise in 2009. If so, providers may continue to experience difficulties in maintaining their enrollment.

Posted on 2010-01-02 16:36:01

A parent writes:

>I pay an individual to babysit my 3yr old child outside my home and pay by personal check each week so that i may work. She has provided me with a background check but refuses to give me her social security number for tax purposes. Can I send a 1099-misc or do I send a w-2? Is it possible to send either form without her social security number?

You can't do anything without the caregiver's social security number, but because the child care is taking place outside of your home, I don't think you need to worry about the 1099-MISC independent contractor form or the W-2 employee form.

Posted on 2009-12-19 20:51:54

IR-2009-119, December 17, 2009

WASHINGTON — The Internal Revenue Service today reminds individual taxpayers who are considering buying a new car that they have until December 31 to take advantage of a tax break that may not be around in 2010.

Taxpayers who buy a qualifying new motor vehicle this year after February 16 can deduct the state or local sales or excise taxes they paid on the first $49,500 of the purchase price. Qualifying motor vehicles include new passenger automobiles, light trucks, motorcycles, and motor homes.

IRS YouTube Video: English - Spanish - ASL

Posted on 2009-12-18 11:00:27

A family child care provider writes:

>I know you do not complete daycare taxes for non-California residents, but could you recommend a good way to find one locally? I live in Charlotte, NC and while yes there are a slew of accountants and tax preparers, instinctively I have not been satisfied.

We are opting not to use our tax guy of a few years. He's made some really big mistakes for our personal taxes. I do not feel comfortable giving him our business taxes, too. Any help you provide is surely appreciated!

I commend you for trusting your instincts and changing tax preparers. Have you read my article entitled How to Find a Tax Preparer?

It has a link to the NAFCC tax preparer directory. Preparers in that directory have not been vetted in any way, but they do have an interest in working with child care providers. I haven't looked to see how many there are from North Carolina.

Posted on 2009-12-14 20:39:27

A family child care provider writes:

>If I purchase a large vehicle (suv/van) for child care business transportation, can I write it off as a business expense?

Yes, you can. That's the simple answer. It's more complicated than that, of course.

The amount of your deduction will depend on how many actual business miles you drive versus personal miles. If you use the van only for business driving, then you can deduct 100% of all your expenses. If you also use it for personal driving, that percentage will be lower.

You have the choice of deducting actual costs or using the standard mileage rate. If you use the standard mileage rate, you can also deduct any auto loan interest, DMV personal property taxes, bridge tolls, and parking fees. When deducting actual costs, you need to save all receipts for gas, repairs, insurance, car wash, etc.

Posted on 2009-12-08 17:35:45

A family child care provider writes:

> I am about to start scanning in all my business receipts and need to create folders/categories for them. As long as I'm setting it up, I'd like to do it right. Do you have a list of the categories you would like my expenses listed under? (cleaning supplies, office expenses, etc.) I can keep doing them as I did in the past, but not sure if that is exactly how you would like them. Thanks in advance for any advice you can give!

Posted on 2009-12-01 22:58:49

Use this great trick from the Bottom Line Personal Newsletter (where I read about Magda Havas and her work on the biological effects of environmental contaminants) to determine if your microwave oven leaks radiation:

Put your cell phone inside the microwave oven and close the door (do NOT turn on the microwave). Call the cell phone number. If you hear the phone ring, the cell phone signal was able to pass through the walls of the oven--meaning that microwaves are able to pass out.

Posted on 2009-11-25 15:00:46

Back in September, I warned clients to ignore the glut of e-mails being sent with the title "Notice of Underreported Income" and seeming to come from the Internal Revenue Service (IRS).

Now I'm receiving multiple e-mail messages seemingly from the Social Security Administration (SSA) with titles like this:

Watch for errors on your Social Security statement
Review your annual Social Security statement

I don't really blame those who accidentally click on the links contained in these messages, because they look quite legitimate. The senders are counting on the fact that a good percentage of us will click on the link before engaging our brains.

BE AMONG THOSE WHO THINK FIRST AND REMEMBER:

Government agencies do NOT send out notices or other unsolicited messages by email.

Government agencies will NOT ask you to follow links in messages.

ALWAYS BE SUSPICIOUS if you receive unsolicited e-mail from the SSA or the IRS or any other entity (such as your bank or credit card company).

Posted on 2009-11-23 17:45:23

Day care providers with helpers generally use some kind of payroll service. Or they may avoid payroll issues altogether and improperly giving their worker a 1099-MISC at the end of the year, rather than the required Form W-2. Unfortunately, the 1099 approach can backfire and cost you more than treating your helpers as proper employees.

Some child care providers have taken on the payroll paperwork themselves. Read my Payroll Tax Guide to see what that entails.

Many, if not most, providers with helpers are dissatisfied with their options. It's risky to neglect payroll paperwork, but payroll services can charge $60 (or more) every payday. On the other hand, it's complicated and time consuming to handle the payroll tasks yourself.

Over the last several years I have encouraged many family child care providers to treat their helpers properly as employees, but I have not found a satisfactory payroll service to recommend.

For this reason, I launched my own daycare-specific payroll tax service for California child care providers on January 1, 2010.

Posted on 2009-11-21 23:08:12

I recommend you watch this video:

Cell Phones & Cigarettes: What do they have in common?

In 8-minutes it presents some of the health effects associated with cell phone use especially by young people and pregnant women. It also draws on similarities between cigarette smoking and cell phone use. A must-see for teenagers and parents......and child care providers.

It was produced by Magda Havas, PhD, Professor of Environmental and Resource Studies at Trent University in Canada.

Posted on 2009-11-20 15:46:28

Some of you already have a website for your business. For those child care providers still thinking about it, please heed this advice:

Stop by GoDaddy.com (a low cost registrar) right now and do a domain search on your business name.

If your business is "Harriet's Happy Kids," type "harrietshappykids" into the domain search box and see what comes up. Hopefully, harrietshappykids.com is available, in which case I urge you to waste no time in buying the domain before someone else does. Even if you don't need it now, it's worth $10-$15 per year to secure the rights to your business domain name. Otherwise, beware of the domain troll. He could be lurking under a bridge near you!

The domain troll caught up with me and this is my cautionary tale.

Posted on 2009-11-18 22:49:07

From working with family child care providers, I know that many of you host events where food and/or entertainment is provided.

The question is whether all of the costs associated with such parties are deductible on your income tax return.

The answer is, "It depends."

I'm not talking about parties you have for day care kids during business hours, which are always 100% deductible.

My comments concern evening and weekend gatherings for the kids and their families, in which case the guest list can determine how much of your costs are allowed on your tax return as an expense.

Posted on 2009-11-16 23:01:24

Persons you pay to come into your home and work in your family child care business are almost always your employees. It doesn't matter how few hours they work. They are employees whether you hire them for one day, one week or an entire year. Full time, part time, it doesn't matter.

The only circumstance where a person helping you care for children is not your employee is if this person is in the business of providing substitute care. Such a person should be advertising to the public, give you a tax id number, provide services to multiple child care providers, and have a business contract for you to sign. You should also receive an invoice or bill.

Posted on 2009-11-16 20:10:36

2011 Estimated Tax Due Dates

First Quarter: April 18, 2011
Second Quarter: June 15, 2011
Third Quarter: September 15, 2011
Fourth Quarter: January 17, 2012

Scroll to the end of Form 1040-ES to find the payment vouchers and mailing addresses for federal payments. You can type your information into the vouchers and print them.

California estimated tax payments can be made using Form 540-ES payment vouchers or through the Franchise Tax Board's Web Pay service.

IMPORTANT: Always be sure to write your social security number on your check, as well as the form number and the year for which you are making payments.

Posted on 2009-11-11 23:03:06

Wage earners have taxes withheld from their paychecks. Child care providers and other self-employed persons with a positive income are required to make estimated tax payments. Otherwise, an underpayment penalty may show up on your income tax return, which is calculated on Form 2210 (instructions).

To avoid the underpayment penalty, you generally must make quarterly payments during the year. Total payments must equal the lesser of 100% of your total federal tax for the prior year or 90% of what you actually end up owing for the current year. This is why they call it "estimated tax." You estimate what you will owe and send it in. Or you can fall back on the "safe harbor rule" and calculate payments based on your prior year federal tax. (Note that for higher income taxpayers - generally above $150,000 - the safe harbor percentage goes up to 110% of the prior year tax.)

This is not necessary to make estimated tax payments if you expect your business to show a loss for the year--meaning that you expect your business expenses to be greater than your child care income.

Married providers can avoid making payments if their spouse has enough income tax withheld from his paycheck to cover their joint income tax.

If you haven't made any payments yet this year or have missed payments, it's never too late to catch up and at least pay something.

Posted on 2009-11-11 22:35:48

This article is courtesy of Resources for Child Caring.

Related article on this site: Hire Your Children for the Summer and Small Business Payroll Tax Guide

Many providers take advantage of the tax benefits of hiring their own children to work for their business. The wages paid to your own children can be deducted as a business expense. If your child is under age 18, these wages are not subject to Social Security/Medicare taxes, and your child doesn't have to report earnings on their tax return unless they make more than $5,350. (Wages paid to spouses or children age 18 or older are subject to Social Security taxes and must be reported as income on the person's tax return.)

When hiring your own children, you can pay them to do work for your business, but you cannot pay them to do personal household chores. What is the difference?

A recent US Tax Court case shed light on this question.

Posted on 2009-11-03 19:12:17

A family child care provider writes:

>I am thinking of doing daycare out of my home for one family in Minnesota. I would like to know if I need to be licensed in order to claim expenses as deductions on my taxes?

I am only familiar with licensing rules in California, so I don't know if Minnesota requires you to be licensed when caring for the children of only one family. You should find out, because the answer will affect your tax deductions. California does not require a license in this situation.

Posted on 2009-08-31 15:32:25

A family child care provider writes:

>The meal credit rates for home daycares shown on your web site are through June, 2009. When do you think the July 1 ones will be available?

I just checked and the July 1, 2009 rates have been released on the USDA website. I have now incorporated the new rates in my Standard Meal Rates for Family Child Care Providers article.

The new rates are effective immediately for food program reimbursements.

For income tax purposes, the July 1, 2009 rates just released will apply to 2010 tax returns. The July 1, 2008 rates apply to 2009 tax returns

Posted on 2009-07-28 14:43:08

The husband of a potential family child care provider writes:

>I hold an H-1b visa working at a biotech company. My wife and I are in the process of green card application. Our I-140 has been approved and now are waiting for I-485. My wife now holds an H-4 visa and she only has an ITIN. My question is: Is it illegal for her to start a family daycare? If not her, how about me? What's the best option for us?

I am no expert when it comes to immigration/visa questions, but I went to Google and pulled up this page:

http://answers.google.com/answers/threadview/id/605159.html

Posted on 2009-07-14 23:56:25

The First-Time Homebuyer Credit is still available for homes purchased through November 30, 2009. This year's credit is a true credit. (The 2008 credit was really loan paid back over 15 years.) It's also "refundable," which means the credit is treated like a tax payment. Therefore, even if you have no tax liability, you will get a refund equal to the amount of the credit (up to $8,000).

If you purchase a home in 2009, the credit equals the lesser of 10 percent of the purchase price of the home or $8,000 ($4,000 if married filing separately). However, if your income is too high, you may lose some or all of the credit because it is phased-out when your modified adjusted gross income is between $75,000 and $95,000 ($150,000 and $170,000 if married filing jointly).

Posted on 2009-06-30 00:02:18

The Consumer Assistance to Recycle and Save Act of 2009 authorizes the issuance of an electronic voucher to offset the purchase price or lease price for a qualifying new fuel efficient vehicle upon the surrender of an eligible trade-in vehicle to a dealer participating in the program. Receive a $3,500 credit when you trade a car rated at 18 miles per gallon or less for a new car rated at 22 mpg or more. You will get $4,500 if the replacement gets at least 10 mpg more than your old vehicle. To qualify, your trade-in must be a 1984 or newer model that's in drivable condition. Also, you must have owned and insured it for at least one year prior to trading it in.

Posted on 2009-06-29 23:54:26

For 2009 and 2010, you can claim a refundable Making Work Pay Credit if you are employed. The amount of the credit equals the lesser of 6.2 percent of your earned income or $400 ($800 if married filing jointly). However, the credit is phased-out when your modified adjusted gross income is between $75,000 and $95,000 ($150,000 and $190,000 if married filing jointly).

Posted on 2009-06-29 21:42:52

All or part of your unemployment benefits received in 2009 will be tax-free under the American Recovery and Reinvestment Act.

Posted on 2009-06-29 21:37:59

The Hope Credit, which was a tax credit available for tuition expenses paid during the first two years of college, has been expanded and renamed the American Opportunity Tax Credit for 2009 and 2010.

Taxpayers can now claim up to $2,500 per student, per year for the first four years of post-secondary education. This is much better than the Lifetime Learning Credit, which is limited to $2,000 per return, per year for all eligible students. You cannot claim both credits for the same student in the same year, so you must choose one or the other.

Posted on 2009-06-29 21:36:07

There is a new deduction for state or local sales tax imposed on new motor vehicles purchased after February 17, 2009, and before 2010.

Posted on 2009-06-26 18:22:55

There are benefits to hiring family members to work in your sole proprietor business and many daycare providers take advantage of this. If your children are under the age of 18, you are not required to withhold social security and Medicare taxes from their wages. You are also not required to pay federal unemployment taxes (FUTA) on their wages until they reach the age of 21. Spouse and parent employees are also exempt from FUTA, but you must withhold social security and Medicare taxes.

You do have to follow the normal payroll rules, file payroll tax returns and withhold income tax. And you must prepare a Form W-2 for your family employee at the end of the year.

On the other hand, if your relative works for you on a limited basis, you might not want to hire them at all. You can consider Tom Copeland's suggestion to gift them some money instead. If you go this route, however, you cannot deduct the cost as a business expense for income tax purposes.

Posted on 2009-06-26 18:16:35

Required minimum distributions (RMDs) from qualified plans [i.e., 401(k), 403(b), 457(b), etc.] and IRAs have been waived for 2009 only. Thus, you do not have to take an RMD for 2009 if you are the account owner or a beneficiary. If you already withdrew your RMD for 2009, you may be able to roll it over to an eligible retirement plan within 60 days.

Posted on 2009-06-26 18:12:33

The Nonbusiness Energy Property Credit for energy-efficient improvements to your principal residence was not available in 2008. However, it’s back again for two more years in 2009 and 2010.

The credit equals 30 percent of the amount paid for:
• Qualified energy efficiency improvements (i.e., insulation, windows & doors, metal/asphalt roofs, etc.); and
• Residential energy property expenditures (i.e., central air conditioners, natural gas furnaces, tankless water heaters, biomass fuel stoves, etc.).

This credit is available for existing homes only and is limited to $1,500.

Posted on 2009-06-26 18:09:33

In addition to the energy credit for home improvements, you can claim a Residential Energy Efficient Property Credit equal to 30% of the cost for property that uses solar energy to generate electricity or heat water for your residence. You can also claim this credit for property that uses a wind turbine to generate electricity in your residence, or equipment that uses the ground or ground water to heat your home.

This credit is available for existing homes and new construction through 2016 with no upper limit, except as noted later in this article.

The following property qualifies for the credit:
• Solar electric property;
• Solar water heating property;
• Fuel cell property;
• Small wind energy property; and
• Geothermal heat pump property.

Posted on 2009-06-26 18:06:47

A family child care provider writes:

>Would you mind telling us the best software to purchase for our daycare business? We would like to keep our records better than last year.

Better record-keeping is a great goal. It's one of the most straightforward ways to reduce the income and self-employment tax you pay and keep more of your hard-earned dollars. You may earn a higher hourly rate working on your bookkeeping than you do caring for children!

Posted on 2009-06-23 17:20:58

A family child care provider writes:

>My husband is no longer working and does not have medical insurance coverage. We are in the process of getting a family plan through Kaiser, through the business. My question is do we need sign up for a HSA (Health Savings Account) or can we get a regular family plan not under a business plan? I want to make sure I sign up for the right one, so that we will be able to write off the cost on our taxes. Please advise.

Actually, I don't expect that you will be able to get a health plan under the business name. My understanding is that Kaiser business health plans require something like 3 full time employees (and I assume that other insurers have similar restrictions).

Posted on 2009-05-08 12:11:39

A family child care provider writes:

> It has come up in discussion on my providers list that a provider can pay her child to do daycare tasks and then use that payment as a write-off. Is this true?

For instance....if I have my son keep a notebook of mileage and trips for me, and I pay him to do this task, can I use that as a write off? Currently he has always helped me clean up after daycare and helps clean the toys and such, and I do pay him for this. Can any of it be claimed?

Yes, it is quite permissible to hire your child and deduct the payments as a business expense, but there is some criteria to fulfill.

Posted on 2009-04-17 16:14:03

The husband of a family child care provider writes:

> My wife started babysitting in 2008. She works out of our home, the kids are dropped off and picked up by their parents at our home. She baby sits for two separate families, they each have two children under 5 years old, and they are here at different times of the day. Her total income was $1325. This is her only job. How do I report this on our 1040? We file MFJ.

Filing a tax return for a self-employed child care provider is actually pretty complicated. I hope that perhaps you have perused some of the information on my website, including my Letter to New Providers.

Posted on 2009-04-17 12:33:05

Monday, February 23, 2009:

Enrolled Agent Alison T. Jacks appeared before a live audience on "The View from the Bay," a daily afternoon variety show produced in the San Francisco studios of KGO-TV, a local ABC network affiliate.

Long-time consumer reporter, Michael Finney, asked her questions about the Child and Dependent Care Credit, treating babysitters as employees, and the expense deduction for teachers and other kindergarten through 12th grade educators.

Posted on 2009-02-25 15:23:44

A babysitter in West Virginia writes:

> I was babysitting in the children's home for 16 weeks and got paid $4,100. I have asked the mother for a W-2 and she says she doesn't have to give me either a W-2 or a 1099 because I was just a babysitter. She set the hours and I worked in her home... how do I file my taxes?

Posted on 2009-02-02 00:20:52

A family child care provider writes:

> Although I did not receive my childcare license until this year, I purchased many items and supplies last year. I don't want to miss out on these deductions. I also earned a little money caring for two children while their mom attended college courses.

Posted on 2009-01-28 16:00:36

A family child care provider writes:

> My partner and I are both on the license. I am trying to figure out the home (rental) space measurements. Do we split the square footage in half??

It sounds like you are running a home-based child care with a partner. Unfortunately, this is a difficult situation tax-wise. Please consider your options carefully and read Tom Copeland's article entitled Should You Form a Family Child Care Partnership?

I agree with Tom's recommendation that the provider living in the home treat the other provider as an employee. Though many child care providers shy away from employee situations, such an arrangement is actually much simpler and cheaper than setting up a partnership. It may also allow you deduct your entire family's medical costs as a business expense by setting up a medical reimbursement plan as an employee benefit.

Posted on 2009-01-28 13:33:14

> Is a business auto any auto used for business purposes (grocery etc)? We own 2 cars. I have taken both cars at different times to do business related shopping, however, I did not keep records on what outings I took what car. Is that a problem? I also did not write down what our mileage at the beginning of 08 was for either of the vehicles. Any suggestions? Is that a problem when figuring our mileage deductions?

Posted on 2009-01-26 17:28:04

A family child care provider writes:

> Can you please tell me two things? Are we required by law to submit a statement to parents with a TOTAL for their taxes? If so where do I find the law? I heard the only regulation was to provide your ID number. Also, if the parent owes me money and did not follow the rules of the signed contract, can I withhold the statement until their account is paid in full? Is this legal?

Posted on 2009-01-24 13:08:58

A family child care provider writes:

> Maybe you can help me find workers' comp insurance. I have offers from $1,000 per year and this is much too much for a part-time helper who maybe earns about $2,400 per year.

Thank you for this question. It is very important to treat child care workers as employees and very important to have workers' compensation insurance.

Posted on 2009-01-23 15:21:49

A family child care provider writes:

> Just wondering what form to give my parents who have paid for child care so they can do their taxes!

Posted on 2009-01-21 22:22:19

A family child care provider writes:

> I am interested in your services. I would be filing separately from my spouse since he is employed outside the home.

Posted on 2009-01-13 11:44:58

If you're a business owner, you must give a Form 1099-MISC to any independent contractors you paid $600 or more for services provided to your business during the year. You must do so by January 31. Some landlords are required to follow these rules. If you have a rental property, I recommend that you do.

New for 2011: Check out this important update from Spidell Publishing before preparing your 1099-MISC forms. If you paid a non-employee service provider via credit/debit card, PayPal, or other third-party payer, you have no obligation to issue a 1099. If one is required under the new rules, the payment processor will issue the new Form 1099-K.

If it's February already, don't despair, follow these special February instructions immediately. If you have a home office for tax purposes, I recommend that you also give 1099s to any home service providers paid $600 or more. But wait, past February already? You actually have until March 31 to submit 1099s if you file them electronically. (Though March is way late when it comes to providing 1099s to your recipients.). Search the web and you will find many e-file providers or take a look at this list of 1099 e-file providers on the IRS website.

Important: 1099s cannot be used for workers who should properly be treated as your employees and note that day care workers are almost always employees. You must provide them with a Form W-2 instead. Refer to the IRS website for help in determining how to treat your workers: Independent Contractors vs Employees. If you need payroll forms guidance, refer to my Payroll Tax Guide.

Day Care Providers: Potential service providers who you might need to give a 1099 include house cleaners, yard workers, music teachers, tutors, storytellers, and payroll service providers, just to name a few. Generally, any persons with special skills who perform their work with little direction from you. This does NOT include assistants who help care for children.

Sending 1099s is not optional. They are mandatory, unless the service provider is a corporate entity. If your service provider happens to be an attorney, however, a 1099 is ALWAYS required, whether the attorney's business is incorporated or not.

Luckily, 1099s are quite easy to prepare. If you act quickly at the beginning of the year, you can get the forms and prepare them yourself for free.

Posted on 2009-01-04 17:22:05

1099-MISC forms are supposed to be sent to recipients no later than January 31, but the true deadline is February 28 (even in a leap year). That is the deadline for mailing your 1099s to the IRS. You have until March 31 if you submit 1099s electronically.

Read my main article on 1099 preparation to see how simple it is, but pay attention to the pointers in this article if you are preparing the forms by hand in February.

Posted on 2009-01-04 17:19:55

As stated in the Frequently Asked Questions on the website of the California Division of Workers' Compensation, California law requires all employers to have workers' compensation insurance. This is true even when hiring your own child or other family member. Heavy fines can be imposed on employers without coverage.

Posted on 2009-01-03 14:31:23

As part of the IRS’ new program to step up enforcement, they are going to start contacting taxpayers directly via telephone calls if they have a question, are preparing to audit the taxpayer, or are engaging in collection activity against the taxpayer. Like the cop show where the cops are hoping that the suspect doesn’t “lawyer up,” the IRS also hopes that a taxpayer whom they wish to speak to does not have representation. Unfortunately, they are not required to give the equivalent of the Miranda warning like the cops of TV. Be aware that you are never required to speak to any employee of the IRS in the absence of an administrative summons (more on the next page). There is no law or statute which requires you to do so. Please be aware of the following rights you have.

Posted on 2009-01-03 01:15:42

When taking a deduction for your business driving, you must keep track of the business miles and total miles driven. You can calculate your deduction using the rates shown below or you can deduct a percentage of your actual vehicle costs.

These rates are updated every year by the Internal Revenue Service. They apply to cars, as well as vans, pickups, and panel trucks. See Revenue Procedure 2010-51 and Notice 2012-01 for additional details regarding the standard mileage rates.

Auto mileage rates for 2011 were set in January and then increased again in July because of higher gas prices.

Rates effective January 1 through December 31, 2012:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

Rates effective January 1 through June 30, 2011:

• 51 cents per mile for business miles driven
• 19 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

Rates effective July 1 through December 31, 2011:

• 55.5 cents per mile for business miles driven
• 23.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

Continue to the next page for rates for other years.

Posted on 2008-12-03 20:45:36

The Internal Revenue Services seems to be responding to the grim realities of the federal budget by auditing more taxpayers and especially sole proprietors and home businesses. This is not good news for family child care providers and other small business owners.

If you receive a notice from the IRS or your state tax authorities, remember this: It is quite likely that some or all of the proposed tax return changes are incorrect. Many notices are generated by computer and often they take away legitimate business deductions.

Quick action in responding to a notice is the best way to protect yourself against paying additional tax. If you receive a notice from the IRS or the California Franchise Tax Board, do not ignore it!

Posted on 2008-11-13 22:51:06

As a family child care provider, your home is your workplace. Hundreds of items all through your residence are used in your business. Furnishings and room decor contribute to the home care environment that parents have chosen for their children.

Doing a household inventory allows you to take a business deduction for furniture, appliances, and other items used in your business. I strongly urge all new child care providers to take such an inventory. Most established providers can also benefit from taking an inventory, as long as your business start date is not too far in the past and you can still remember what you owned at that time.

Posted on 2008-11-13 22:46:34

As we approach the end of the year, some parents will present their child care provider with a holiday gift. If the gift is an item (flowers, book, plant, etc.), this does not need to be reported as income. If the gift is in the form of cash or a gift card, it does need to be reported as income. You can include the cash or gift card as part of the parent child care payment, or you can list it separately as Other Income.

This C-K Kids Tip is courtesy of Newslink from Resources for Child Caring. Note that it applies equally well to client/customer gifts received by other small business owners.

Posted on 2008-11-13 22:37:17

Family child care providers are no strangers to licensing issues and it can be daunting for those starting out in business. The array of licensing and registrations required can be quite confusing. Let's review and clear up any misconceptions about social service licensing, local business licenses, fictitious business names and IRS tax id numbers.

Posted on 2008-11-10 18:08:12

Persons you pay to come into your home and work in your family child care business are almost always your employees. It doesn't matter how few hours they work.

They are employees whether you hire them for one day, one week or an entire year. Full time, part time, it doesn't matter. Independent contractor situations are rare for daycare providers.

According to the Internal Revenue Service, the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.

Can you even imagine hiring a home child care helper and not controlling what they do and how they do it?

Even if it's late in the year, it's not too late to get caught up on the proper employer paperwork. You have until the end of January (or possibly February) to provide your employees with a Form W-2.

If you're still tempted to treat your worker as an independent contractor, read the rest of this article to learn how this can come back to bite you. Or check out what a nightmare this created for a child care provider in New York.

Posted on 2008-11-10 15:55:52

The Internal Revenue Service announced pension and Individual Retirement Account cost-of-living increases for 2012 on October 20, 2011. Some of the numbers went up slightly, but many are unchanged from 2011 levels.

Here is the full text of IR-2011-103: IRS Announces Pension Plan Limitations for 2012.

Posted on 2008-10-20 23:41:55

August 2008

Here's a tax tip from Tom Copeland:

What are the tax consequences of buying a building to store your extra day care equipment, supplies, furniture, etc.? If you used the building to store items used 100% for your business, then you can deduct 100% of the cost of the building. This would include mortgage interest, property tax, utilities, repairs, insurance, and depreciation of the cost of the building. (If you simply rented space from a commercial storage company, you could deduct 100% of the cost of the rent.) If you stored items that were used by your family as well as your business, you could deduct a portion of the cost of the building (or rent). The business portion would be based on your Time-Space Percentage.

Last updated: 19 May 2011

Posted on 2008-08-15 14:16:23

Total business work time in your home makes up half of the time/space percentage, which determines how much of your home expenses (rent, mortgage interest, utilities, etc.) and other shared expenses can be treated as a business tax deduction on your income tax return. (A shared expense is the cost of any product or service that is used for both business and personal purposes.) To protect and make the most of these tax deductions, you must determine the total number of hours during the calendar year when child care work was being done in your home. This means both hours caring for children and hours taken up with other business-related tasks.

Posted on 2008-08-15 14:12:40

Standard Meal Allowance Rates for 2011 income tax returns
(in the continental U.S.)

$1.19 for each breakfast
$2.22 for each lunch or supper
$0.66 for each snack (up to 3 per day)

Alaska Meal Rates
Hawaii Meal Rates

Meal rates for other years are shown at the end of this article.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Accurate meal and attendance records must be kept when using the standard meal rates. You may find this Meal Form from the Redleaf Press Calendar-Keeper helpful.

Family child care providers may deduct actual grocery cost as a business expense on their income tax return or you may use the standard meal rates provided in this article to calculate your food deduction. Using the standard meal rates is easier and safer, in case of an audit. If you have records showing attendance and meals served, the IRS will not contest a food deduction based on the standard rates. Meal rates must be used for both meals served at home and restaurant meals.

Posted on 2008-08-14 16:04:40

For general information about using standard meal rates to calculate your food deduction, see my main article on meal rates.

This post provides the special rates that apply to family child care providers in Alaska.

Posted on 2008-08-14 16:00:24

For general information about using standard meal rates to calculate your food deduction, see my main article on meal rates.

This post provides the special rates that apply to family child care providers in Hawaii.

Posted on 2008-08-14 15:36:50

[1] If you haven't yet filed a tax return to get your stimulus payment, you still have time to do so. You must file by Oct. 15 to get your payment this year. If you've already filed but have a question or issue, visit the IRS Stimulus Payment answer page.

[2] Keep separate track of business miles driven in the first half of 2008 and miles driven in the second half of the year. For business miles driven from Jan. 1 through June 30, 2008, the standard mileage rate for the use of a car (including vans, pickups, or panel trucks) is 50.5 cents per mile. The IRS raised the rate to 58.5 cents per mile effective July 1.

[3] Last year I wrote of the tax complications facing California Registered Domestic Partners, including the fact that they must file single federal tax returns and a joint state tax return. These same complications now apply to California same-sex married couples. Before marrying or registering a domestic partnership, I recommend that all couples receive competent legal and tax advice. This is especially true for same-sex couples, because lack of agreement between federal and state law creates many thorny issues.

[4] Are you planning on making any substantial gifts? Talk to your tax advisor first. Gifts with values exceeding $12,000 must be reported to the IRS.

[5] Not only will you save money at the pump if you buy a hybrid vehicle, you may be eligible for a credit on your income tax return. Note, however, that the credit is no longer available for certain vehicles, including the popular Toyota Prius. Check the IRS Alternative Motor Vehicle Credit page to see which vehicles still qualify.

Posted on 2008-08-14 00:37:30

When you are liable for a loan but can’t repay it, some lenders will forgive the debt. What many borrowers don’t realize is that this cancellation of debt (COD) often results in taxable COD income in the year of forgiveness. The lender usually will issue a Form 1099-C to report the cancelled debt. If you receive one, don’t ignore it. Be sure to give it to your tax preparer and discuss the circumstances surrounding the loan.

If you have cancelled debt but are bankrupt or insolvent, you may exclude the income on your tax return. To prove insolvency, you must show that your liabilities exceeded the fair market value of your assets immediately before the debt discharge. The amount of forgiven debt that can be excluded cannot be more than the amount your liabilities exceeded the value of your assets.

Posted on 2008-08-14 00:36:16

On July 30, 2008, President Bush signed into law a housing bill aimed at providing mortgage relief for more than 400,000 US homeowners facing foreclosure, primarily by allowing them to refinance high-interest, adjustable-rate mortgages, or ARMs, into less expensive fixed-rate loans backed by the Federal Housing Administration. Certain provisions will limit the number of homeowners who qualify, including a requirement that lenders write down loans to no more than 90 percent of a home's value. The program starts Oct. 1 and ends Sept. 30, 2011.

Posted on 2008-08-14 00:34:36

The federal housing bill just passed contains mostly provisions designed to help taxpayers. Here's one which does the opposite.

Currently, taxpayers are allowed to exclude up to $250,000 ($500,000 on a joint return) of gain from the sale of their principal residence. Generally, you must own and occupy the residence for at least two of the five years preceding the date of sale. A reduced exclusion is permitted for taxpayers who meet certain unforeseen circumstances.

Under the new law, taxpayers will not be allowed to exclude any gain attributable to a "nonqualified use." A period of nonqualified use is any period after January 1, 2009 during which the property is not used as the principal residence of the taxpayer, the taxpayer's spouse, or former spouse.

Posted on 2008-08-14 00:32:52

Just because the stock market lost money doesn’t mean you have a deductible loss. As long as you hold on to an investment, you only have a loss on paper. It’s only when you actually sell the investment that you have a transaction to report on your tax return.

Fortunately, the tax law allows you to offset your capital gains by your capital losses. You can avoid or minimize taxable gain by selling two investments, one at a gain and the other at a loss.

Posted on 2008-08-14 00:31:14

At some point, taxpayers who have a traditional IRA may wish to convert it to a Roth. Roth IRAs are more flexible in that there are no required minimum distributions when the owner reaches age 70½. In addition, qualified distributions from a Roth IRA are not taxable.

Under current tax law, in the year you convert a traditional IRA to a Roth IRA, you must recognize the amount converted as income on your tax return, with the exception of any basis that may be in the traditional IRA. Depending on the amount, this can significantly impact your tax return. It can even bump you up into a higher tax bracket.

New legislation may make it worthwhile to hold off converting your IRA. For conversions made in 2010 only, the income from these conversions may be included in income over the two-year period beginning in 2011. For example, let’s say you convert a traditional IRA worth $40,000 to a Roth during 2010. You won’t need to report the conversion on your 2010 return, unless you elect to. Your 2011 and 2012 returns will each include $20,000 of income from the conversion.

Posted on 2008-08-14 00:29:32

If you have a high-deductible health plan, you are eligible to open a Health Savings Account (HSA). Amounts contributed are deductible for all taxpayers (even those taking the standard deduction) and funds may be withdrawn tax-free to cover out-of-pocket medical expenses, including deductibles (but not premium payments). If you open your account part way through the year, you can still contribute the calendar year maximum for a full tax deduction.

Read on for the contribution limits for tax years 2007 through 2012.

Posted on 2008-05-28 17:00:04

Enrolled Agents have been tested and licensed by the Department of the Treasury. We prepare tax returns and also represent taxpayers before the Internal Revenue Service. If you receive a notice or are audited by the IRS, my Enrolled Agent credential allows me to work directly with IRS personnel on your behalf to resolve things in the best possible way for you.

Folks in your profession need specialized care. Most tax professionals (even experienced ones) are unfamiliar with the nuances of day care taxes. I see many tax returns with both large and small errors that cause the provider to pay more tax than she should or leave her in a risky position in case of an audit.

Please read on for some pointers that will help you get off on the right foot with your record keeping and be ready for tax time.

Posted on 2008-05-06 00:10:37

Posted on 2008-03-25 23:39:16

If you're a day care provider and other home business owner, you may not think you hired any independent contractors, but what about your lawn service? Your window washer? Your handyman? Or the guy who shovels your driveway?

These folks aren't providing services directly to your business, but they do indirectly, if you are taking a home office deduction. If you want to deduct a percentage of what you pay them on your tax return, I recommend that you give a 1099-MISC to any home service provider you paid at least $600 to over the course of the year.

Posted on 2008-02-02 23:31:05

Is your tax preparer familiar with child care tax rules?

The fact of the matter is that there are not nearly enough tax professionals out there with a good understanding of child care taxes. If you are a child care provider looking for help at tax time, this can be very frustrating.

California day care providers interested in working with me should read my Frequently Asked Questions. I am located in the San Francisco Bay Area city of Fremont and I have family child care clients up and down the state.

This article was written to help out-of-state child care providers, as well as California providers looking for a tax professional in their local area.

Posted on 2008-01-31 16:36:55

October 2007

Here's a tax tip from Tom Copeland:

If a parent leaves owing you money, you cannot deduct this as a business expense. You can't deduct what you don't get, but your taxable income for the year will be lower.

A "bad debt" is only deductible if you previously reported the money as income. So if you reported as income $100 that a parent paid to you in December and then the check bounced in January, you could deduct the expense in January.

Last updated: 19 May 2011

Posted on 2007-10-04 01:11:10

RNI's October 2007 Newslink Newsletter

A large percentage of sole proprietors underestimated their income and overestimated their business deductions, resulting in over $93 billion dollars in unpaid taxes for 2001.

This is the conclusion of a July 2007 report, "Tax Gap: A Strategy for Reducing the Gap Should Income Options for Addressing Sole Proprietor Noncompliance" issued by the Government Accounting Office for the US Senate.

This fact is probably behind the increase in IRS audits of family child care providers and is likely to continue.

Posted on 2007-10-04 01:06:41

Are you a day care provider considering incorporating your business for increased liability protection? If so, please review the following two-part discussion of this topic by Tom Copeland. Once you do, I think you see that the increased costs to you, and especially the loss of your home-related expenses as a deduction on Form 8829, Expenses for Business Use of Your Home, are huge drawbacks. If you decide to proceed with incorporation, get the advice of a tax professional and a legal professional well versed in the business of family child care. Note that I do not recommend setting up a family child care business as a partnership either.

A Limited Liability Company (LLC) is another business entity available to child care providers, though the amount of such additional liability protection provided by an LLC is unclear, as Tom explains below. Still, I believe an LLC is a better and simpler option than incorporating, as long as it's set up to have only a single member. Do not make your spouse or anyone else a member. That way you can remain a sole proprietor for income tax purposes.

Spouses looking for the best way to operate a home child care together will find that it is cheapest and simplest to have one spouse act as the owner and hire the other spouse. This arrangement may even make it possible to deduct your entire family's medical costs as a business expense by setting up a medical reimbursement plan as an employee benefit.

Posted on 2007-09-28 14:47:43

National Association of Tax Professionals (NATP) Appleton, WI – With children and teachers back in school, the National Association of Tax Professionals (NATP) reminds educators, parents, and students that the IRS has various education-related deductions and credits that can benefit them when filing their 2007 federal income tax return.

Posted on 2007-09-24 22:30:04

This document lists the information that I ask my day care clients to provide at tax time:

Click here to download - Child_Care_Tax_Return_Checklist.pdf


Last updated 28 January 2009

Posted on 2007-09-11 22:12:46

Self-employed business owners, including day care providers, need an Employer Identification Number (EIN) if they have employees. Day care providers, with or without employees, have another reason to obtain this tax id number for their business: IDENTITY THEFT PREVENTION.

We're getting close to the end of the year when parents will be requesting your tax id number for the purpose to claiming the federal Credit for Child and Dependent Care Expenses. They may even ask you to fill out a Form W-10, Dependent Care Provider's Identification and Certification. (Most parents don't realize this is the official form they should be using.) Many providers give out their social security number, but it is much safer to give parents an EIN.

Not a day care provider? Do you provide other services as a sole proprietor? Anyone ever ask for your social security number or give you a W-9, Request for Taxpayer Identification Number? You, too, should protect your social security number and get an Employer Identification Number. Give your EIN to clients before they prepare their 1099-MISC forms at the end of the year.

Posted on 2007-09-08 20:44:03

August 2007

Here's a tax tip from Tom Copeland:

Although there are hundreds of items that a family child care provider (or other small business owner) can claim as a business expense, not everything is deductible. Here are some items that are considered personal expenses by the IRS and may not be deducted:

• parking or speeding tickets
• the cost of the first phone line into your home
• the cost of personal clothing (children's clothing would be deductible)
• pet care (it may be possible to deduct expenses for animals other than a dog or cat if you can show how they help children learn)
• assessments on your property tax statement (for sidewalks, sewers, or other land improvements)
• mortgage insurance
• the purchase of land

Last updated: 22 May 2011

Posted on 2007-08-03 21:40:03

National Association of Tax Professionals (NATP) Appleton, WI – If you wait tables, bus tables, park cars, tend bar, serve cocktails, deliver food, or entertain, and you received $20 or more in tips in any one month – you must report all your tips to your employer. This includes cash tips, charge-card tips, and any tips you get from other employees, minus what you ‘tip out’ or share with colleagues. The IRS requires that federal income tax, social security, Medicare taxes, and, in some cases, state income tax be withheld from income earned through tips.

Posted on 2007-08-03 18:11:56

National Association of Tax Professionals (NATP) Appleton, WI – National Association of Tax Professionals (NATP) Appleton, WI – What is more exasperating than having to pay taxes? Understanding the constantly changing legislation affecting them! Yet, not fully understanding rights and how provisions work together costs taxpayers significantly every year. A mid-year tax review with an expert will help you. Here is why. Following are some common areas fraught with complex rules that cause taxpayers to miss valuable opportunities to leverage their options and lower their tax bills. Financial advisors and tax preparers are experts in these areas so you don’t need to be. Call your tax advisor for your mid-year review soon to discuss your financial plans and learn how you can save on your next tax return.

Posted on 2007-08-01 15:14:41

National Association of Tax Professionals (NATP) Appleton, WI – Fraud perpetrators have found the perfect means to intimidate taxpayers into filling out legitimate-looking, but phony, Internal Revenue Service (IRS) forms – using the threat of government action or loss of tax refunds if you don’t respond. In the latest e-mail scam, consumers have received a “Tax Avoidance Investigation” e-mail claiming to come from the IRS’ “Fraud Department” in which the recipient is asked to complete an “investigation form,” for which there is a link contained in the e-mail. It is believed that clicking on the link may activate a Trojan Horse that has the potential to take over a person’s computer hard drive and allow someone to have remote access to the computer.

Posted on 2007-08-01 15:04:27

July 2007

Here's a tax tip from Tom Copeland:

One of the most important records to track throughout the year is the number of meals and snacks that you serve the children in your care. If you are on the Food Program, keep a copy of your monthly claim form. But you should also be recording on a daily basis the additional meals and snacks you serve for which you are not reimbursed by the Food Program. Such snacks do not have to be nutritious, and you don’t need to keep a menu. Keeping an accurate count of meals and snacks will make a big difference when you deduct food expenses on your tax return using the Standard Meal Allowance. If you serve one un-reimbursed snack to one child per day, this is equal to $150 in food deductions for the year. [Alison adds: At 2010 rates, make that $165 for serving a additional snack 5 days per week, 50 weeks out of the year.]

Last updated: 22 May 2011

Posted on 2007-07-06 17:45:10

Most family child care providers use a full service payroll company to generate paychecks, W-2s, and prepare quarterly payroll tax returns, as well as making payroll tax deposits. This is the best way to go for most small business owners. It can be a headache to deal with the many payroll tax forms yourself (federal and state), especially since the penalties can be high when you miss a deadline.

Family Child Care Taxes offers an affordable payroll service for California child care providers.

If you feel you have the time, as well as a knack for detail-oriented number crunching and remembering deadlines, you can certainly do all or some of the payroll tax work yourself. Even if you engage a payroll service, you should know enough about payroll taxes to monitor the service you receive. This Federal and California Payroll Tax Guide serves both of these purposes.

Remember, child care workers are almost always employees, so there's no getting around setting up payroll and doing things properly. Visit the IRS website and learn how to distinguish between an employee and an independent contractor. Even very short-time or part-time workers are employees.

California family child care providers must pay their workers at least the California minimum wage, which is currently $8.00 per hour (effective January 1, 2008). Minimum wage may be higher in some parts of the state. Minimum wage in San Franciso is $10.24 per hour (effective January 1, 2012).

You cannot pay a flat daily, weekly or monthly amount. Have your workers sign in and out to document hours worked. For information regarding other California labor laws, contact the Division of Labor Standards Enforcement (DLSE) within the Department of Industrial Relations (DIR).

Posted on 2007-07-06 03:15:04

Tom Copeland describes this method in detail in a Resources for Child Caring article.

Payroll taxes for California employers consist taxes paid by the EMPLOYER:

• Half of social security and Medicare
• State unemployment insurance
• State employer training tax

And taxes paid by the EMPLOYEE:

• The other half of social security and Medicare
• State disability insurance (SDI).

Employers using the method described in this article choose to pay the employee's taxes as well as their own, either by choice or because they failed to withhold the employee taxes shown above from a worker's pay.

This simplifies things on paydays somewhat because you no longer have to calculate or withhold social security, Medicare or SDI when writing out paychecks. You write each paycheck for the employee's full hourly wages, without deductions. (Except that you may have to deduct income taxes using the appropriate tax tables. More on that later.) Then you pay all the payroll taxes yourself when you file your quarterly payroll tax returns (assuming you are a quarterly payer). You will pay somewhat more in taxes, but you may save time and/or payroll service fees. (For a complete discussion of payroll taxes see my Payroll Tax Guide.)

I have used this method when paying my own employees in the past, but came to the conclusion that it made the paperwork more complicated, not less. Now I use it exclusively in the situation where a client didn't withheld taxes from workers' paychecks. That being the case, the employer client really has no choice but to pay all of the payroll taxes, unless the employee agrees pay back amounts that should have been withheld for social security, Medicare and state disability insurance.

Posted on 2007-07-06 03:10:37

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July 2007

Here's a tax tip from Tom Copeland:

Now is a good time to review your record keeping practices since we are in the middle of the year. Your goal is to have a receipt for every item you use in your business: supplies, cleaning supplies, toys, furniture, household items such as toilet paper, light bulbs, detergent, etc.

If you don’t have a receipt for all purchases, take a photograph of the item and write a note describing where you bought it and how much it cost. Estimate if you have to. Save any cancelled check or credit card statement as well. Make a note on the receipt as to whether the item was used 100% for your business or was used partly for business and partly for personal purposes.

Posted on 2007-06-20 17:30:43

National Association of Tax Professionals (NATP) Appleton, WI – With the arrival of summer, many of you are packing up and heading to your vacation homes. For some, the time you are not there is an opportunity to make some extra income by renting out your property. The National Association of Tax Professionals (NATP) reminds you that if you receive income from renting your vacation home to others, you may deduct certain expenses. These expenses, which may include interest, taxes, casualty losses, maintenance, utilities, insurance, and depreciation, will reduce the amount of rental income that is taxed.

Posted on 2007-06-19 22:27:01

May 2007

Here's a tax tip from Tom Copeland:

If you buy items at a garage sale, you need to keep an adequate record to deduct it as a business expense.

There are several things you can do: Bring along a sales book for the homeowner to sign. Make out a note of the transaction which states the date, place, item purchased, and amount paid. Take pictures of the items.

If you are hosting your own garage sale, you probably will not have any tax consequences. If you sell items at a loss that you only used personally, you don't have to report the income received. If you sell items at a loss that you used in your business, you could report the business loss as a tax deduction, or not report anything at all. It's unlikely that you'll sell any item at a profit, but if you do, you must report it as income on Schedule D.

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The Internal Revenue Service once again warned taxpayers that identity thieves are not above posing as the IRS in order to trick people into revealing private personal or financial information. Commissioner Everson warned, "Don't be fooled by these shameless scam artists. The IRS doesn't send unsolicited e-mail."

Should you receive a fake IRS e-mail, the IRS asks that you refrain from opening any attachments and forward the message to the following e-mail address: phishing@irs.gov. Those of you interested in the full IRS press release on this topic, please click here. And thanks to a sharp-eyed EA, you may view an actual fraudster e-mail here.

Courtesy of the National Association of Enrolled Agents e@lert newsletter for April 7, 2007.

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Due to recent legislation, the IRS is tightening up rules for charitable contributions. Please read below and learn how to protect your deductions.

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National Association of Tax Professionals (NATP) Appleton, WI – Because having a family member with special needs can be costly, it is particularly important that these families take advantage of all the tax deductions and credits to which they are entitled. Unfortunately, many taxpayers who qualify for these tax breaks are unaware and fail to claim them. Lesser-known tax breaks are hard to keep up with, and even tax preparers who may have limited exposure to these situations can miss them. As a taxpayer, it’s important to be informed.

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Update 7 November 2008: This article was originally posted in December 2006, but teachers have reason to rejoice again. October legislation has extended the teachers' classroom expense deduction retroactive to the start of 2008 and through 2009.

National Association of Tax Professionals (NATP) Appleton, WI – In a victory for teachers who frequently spend their own money on behalf of their students, Congress, in last-minute legislative action before year-end, approved an extension of the $250 tax deduction for teachers who incur expenses out of their own pockets during the 2006 and 2007 tax years. The president added his signature on December 20, 2006.

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NATP Information Release Summary:

--Over half the population now employs the services of a tax preparer; a direct outcome of ever-increasing complexity of tax legislation.

--“Over-the-counter” tax software is only as good as the numbers entered and the understanding of the individual doing the input.

--Tax preparers study year-round to keep up-to-date on the changes, investing significant amounts of time and money.

--To determine what kind of tax preparations services are right for you, here are several things to consider.

--Know the differences between types of preparers (brief descriptions).

--Check references.

--Always be certain that the preparer signs the return.

--Link to receive a free brochure. http://www.natptax.com/2005findataxprobrochure.pdf

Members of the National Association of Tax Professionals (NATP) work at offices that assist over 11 million taxpayers with tax preparation and planning. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. NATP has nearly 18,000 members nationwide. Members include individual tax preparers, enrolled agents, certified public accountants, accountants, attorneys, and financial planners.

Learn more at www.natptax.com.

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Tom Copeland has made some IRS Audit Resources Available for family child care providers and tax professionals representing them on his Taking Care of Business Blog.

Here are his comments on a 2007 child care provider audit situation:

When the IRS audited family child care provider Kay Gillock last fall, there were two main issues in dispute: how much space in her home did she use in her business, and how many hours did she work in her home. Kay claimed she used 98.87% of the space in her home and worked 84.8 hours per week (50.3%). When the auditor issued his report that allowed only 57.31% of her space and 44.4% of her time, Kay fought back--and won.

The way that Kay responded to the IRS report is a textbook example of how to make a case to the IRS in an audit. With Kay's permission we have made the IRS report, her response to the report, and the IRS letter that conceded these two issues available on our Web site as a downloadable PDF. Family child care providers can learn much from these documents on how to prepare their own audit defenses.

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December 2006

Here's a tax tip from Tom Copeland:

Can you deduct expenses for your dog or cat? The short answer is "no." The IRS views dogs and cats as too personal to be deducted as a business expense. In over 20 years of representing providers in IRS audits, I have never won a deduction for the upkeep of either a dog or cat.

You can deduct the cost of keeping a dog away from the children (fence or leash). In addition, you can deduct the cost of immunization of these pets, but only if your local community does not already require such immunizations for all pet owners.

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National Association of Tax Professionals (NATP) Appleton, WI - Imagine the delight of a young teacher working to complete her master's degree who found out that by filing the 1040 long form tax return instead of the short form, she could receive a $3,000 refund. It's only one example of how itemizing deductions can pay off. When it comes to tax deductions, little things mean a lot. For those who assume they won't qualify, think again. If you keep careful records of your expenses, you may have a delightful surprise coming, just like this young client of NATP tax preparer, Louise Gritmon.

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These rates also apply to California Paid Family Leave (PFL).

The CA SDI rate for 2012 is 1.0% (0.01). The taxable wage limit for 2012 is $95,585 for each employee per calendar year. The maximum amount to withhold for 2012 is $955.85.

This rate is published annually by the California Employment Development Department.

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National Association of Tax Professionals (NATP) Appleton, WI - What do you get when you team up two unethical CPAs with a millionaire who wants to believe he is exempt from paying taxes? BIG TROUBLE. So go the allegations about actor Wesley Snipes and his tax advisors, Eddie Ray Kahn and Douglas Rosile are just the latest in a long string of schemers attempting tax evasion. Obviously, they should have spent a little more time reading old Dick Tracy comics in which Tracy repeated the FBI slogan, "Crime Does Not Pay."

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Everyone who itemizes their deductions should be aware of changes to the charitable tax deduction rules included in the Pension Protection Act of 2006, signed by President Bush in August. I have long thought of charitable giving as one of the last remaining write-offs my clients could count on, but no more. You will have to work harder for your charitable deductions starting immediately.

The details below are abbreviated from a recent National Association of Tax Professionals (NATP) press release. The bulk of the changes can be summed up in a single word: receipts.

Changes regarding cash/monetary contributions (effective 8/17/06)

- You must have a bank record, a receipt, or written communication from the charity or non-profit showing the organization name, date of the contribution, and amount for all contributions of money, regardless of the amount.

Note: Looks like your canceled check is valid proof for donations under $250. Prior law still requires a written acknowledgement for contributions of $250 or more, however. The real pain is that now you must have written acknowledgement for all cash donations, big or small. There goes my deduction for the $5 I gave to the neighor kid for his school walk-a-thon!

Changes regarding noncash contributions (effective 8/17/06)

- You may only donate clothing or household items in good used condition, or better. (Exception for single items of more than $500 value that include a qualified appraisal.)

- The IRS may deny deductions for items of minimal monetary value, such as used socks and undergarments.

Changes regarding food donations (effective 1/1/06)

- Food must be "wholesome" -- intended for human consumption and meeting government quality and labeling standards.

- You must obtain an itemized receipt containing the same information as those needed for cash/monetary contributions mentioned previously.

The changes affect everyone who contributes to charitable organizations at any level. "Church-goers who used to put cash in the collection plate each week must now either write a check or take advantage of the church's envelope system," remarks Jersey City, NJ, NATP tax professional, Robert D. Flach, author of the blog, THE WANDERING TAX PRO.

Sam Grubbs, an enrolled agent and NATP member in Columbus, GA, adds, “Unfortunately, this may negatively impact collections such as the MDA drive over Labor Day weekend by the firefighters. Will you ask the firefighter for a receipt when you drop a dollar in the boot?"

My two cents: "Don't expect to deduct donations to a holiday canned food drive this year, but please give anyway!"

Last updated: 17 October 2006

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These Frequently Asked Questions pertain mainly to income tax preparation services.

New income tax clients must be California family child care providers doing in-home day care. Please read the FAQs below and check out my blog post for prospective income tax clients. There you will learn whether or not I am currently taking new tax preparation clients.

If you are hiring, please visit our Payroll page and check out the steps for starting up payroll service. We always welcome new payroll clients.

If you are a new child care provider or fairly new, I suggest that you read My Letter to New Family Child Care Providers.

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