The rewarding nature of owning and managing a childcare business is that you and your team provide vital services to parents who entrust their children to you every day. In addition, daycares have taxes, as do just about all businesses. When it comes to daycare taxes, you should keep records, file returns, and stay in good standing with the IRS.
Take a look at these topics which will be the focus of this article:
- Legal Structure
- Types of taxes to pay
- Keep accurate and up to date records
The whole article is available as a video on our YouTube channel. In addition, we have many other tips like this on our YouTube channel, so you may also find that helpful.
- Legal Structure
The childcare industry in the United States is generally divided into two significant types: Family Day Cares, where someone runs a small childcare business from their home, and Child Care Centers, which are more prominent, commercial entities.
Child Care Centers are classified as tax-exempt businesses by the IRS if they are typically operated separately from the owner’s residence and provide childcare to many children. Child Care Centers are usually employee-driven businesses, and they may be owned jointly by multiple owners.
It is further noted in the guidelines that most child care centers are organized as corporations (Form 1120), S corporations (Form the 1120S), or partnerships (Form 1065).
Different tax structures apply to these company types:
Corporations rely heavily on profits and pay a corporate tax on them. Dividends paid to shareholders are typically taxable, and shareholders are not personally liable for any corporation’s debts.
-> S Corporations:-
Shareholder profits are directly passed from company to shareholder. Therefore, corporate taxes are not due, but shareholders must declare earnings on their tax returns, and there is no personal liability for shareholders.
The profits of a partnership are passed on to the partners, who repay any debts owed by the association. Thus, partners may be fully responsible for the partnership’s obligations.
To determine which group structure leads to the lowest daycare tax bill, you need to consider your business’s size and each partner or shareholder’s tax profile.
- Types of taxes to pay:-
A childcare business in the United States is subject to the same taxes as any other business. These taxes include:
- Corporate income tax:-
Tax laws that apply to corporations are complicated, and you will need help if you are managed like a corporation. The federal rate is currently 21 percent, but your effective rate might differ depending on your state and local rules.
- Payroll tax:-
When you hire employees, you will be required to pay social security taxes and Medicare taxes. Along with their wages, income taxes have to be withheld. Be aware that certain tax credits may be available to workers. Therefore you need to calculate their tax liability accurately.
- Property tax:-
As with any other business, you may have to pay property taxes on your commercial property.
- Sales tax:-
As a childcare provider, you aren’t required to collect sales tax from parents. If you purchase equipment from out-of-state, however, you may have to pay an additional use tax.
- State and local tax:-
Your daycare business may help you qualify for self-employment tax benefits, like Social Security and Medicare contributions. However, as a self-employed individual, you are responsible for your taxes, including income tax on earnings and self-employed tax.
A tax expert can guide you on any additional taxes and charges you may need to pay in your city.
- Keep accurate and up to date records:-
A failure to meet your tax obligations could pose a threat to an IRS audit and some heavy fines. Fortunately, keeping detailed records will help you avoid such issues.
- Invest in a childcare management system:-
With the right system in place, you can make sure that your staff schedules and invoices are accurate at all times. In addition, filling out your next tax return will require you to have this data correct. When you use a childcare management system (CMS), you can manage every aspect of your business.
- Payroll Maintenance:-
To accurately calculate the income tax withheld, you’ll need to track the hours worked. In addition, medical, Social Security, and other taxes will also be impacted by the number of hours worked, so make sure you keep records accurately.
- Keeping Track of Tax Deductible Expenses:-
You can deduct every penny you spend. Keep every invoice and receipt, and ask your accountant to help you decide which expenses are deductible and which are not.
You may be responsible for the following things as deductibles:-
- Bank Fees
- Advertising costs
- Education for the staff or yourself
- Knowing and taking advantage of Tax Credits:-
A tax credit is a reduction of your overall taxable income that is applied to your gross income. You can set one up for yourself if you have a large number of credits.
The federal, state, and local governments offer a variety of tax credits for a variety of reasons, including creating employment opportunities, going green, and making the business more accessible.