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The Business Side of Kith and Kin |
Those who get paid for caring for children in their home are running a business. It doesn't matter if it's called Kith and Kin, Exempt Care, Legally Unlicensed Care, or Family, Friends and Neighbor Care. It doesn't matter if the person is only caring for relatives, or for one child of a friend. It doesn't matter if the amount of money paid for child care is less than $100 a year. If money is exchanged for the care of children in the home of the caregiver, then the caregiver must face a variety of business responsibilities.
Kith and Kin caregivers are often unaware of their business responsibilities when they decide to care for children. This lack of understanding can create problems of federal and state taxes, exposure to the loss of homeowner's insurance, greater risks of liability lawsuits, and conflicts with parents over payment.
Taxes
Anyone who earns money caring for children in their home is responsible for reporting this income to the IRS and to their state (in most cases). Caregivers can also deduct business expenses, which will reduce their taxes on this income. If a caregiver is in compliance with their state regulations, she can deduct the same expenses for her business as a licensed caregiver. In other words, if state regulations say that a person is exempt from these regulations if she cares for children from one unrelated family, then this person can deduct the exact same business expenses as a fully state licensed provider. If a state has a system for certifying or registering Kith and Kin caregivers and a person complies with these rules, then the caregiver may deduct all business expenses, which include food, toys, supplies, car mileage, furniture depreciation, and house-related expenses such as utilities, property tax, house rent, house insurance, mortgage interest, house repairs, and house depreciation.
Kith and Kin caregivers who take advantage of claiming all of these business deductions on their tax return may discover that they have more deductions than their income. In this situation caregivers should not show business losses year after year because the IRS will not allow it. Showing a very small profit each year is acceptable. Some caregivers (grandmothers, for example) may earn little other money besides child care fees, and as a result they may owe little, if any, federal or state income taxes. However, caregivers who show a profit of above $400 will always owe Social Security taxes.
Some Kith and Kin caregivers may also be eligible for other federal and state programs that assist low-income families (Temporary Assistance for Needy Families, Food Stamps, General Assistance, Supplemental Security Income, and more). The income eligibility for these programs is based on a caregiver's "net income," not their "gross income." "Net income" is defined as business income minus business expenses. As a result of the many deductions Kith and Kin caregivers can claim, their "net income" is likely to be very low and it is unlikely that any benefits they receive from such programs will affect them.
Insurance
Caregivers who bring children into their home expose themselves to greater risks of injury to children, lawsuits, and property damage. Virtually any injury to a child will be the responsibility of the caregiver. Licensed providers can protect themselves by purchasing business liability insurance, but Kith and Kin caregivers generally cannot get such insurance if they do not meet the highest regulation standards of their state. Many assume that their relatives and/or friends will not sue them if their child is injured. This can lead to tragic consequences.
In addition, although some homeowner's policies will cover the home and the contents of the home if the provider cares for fewer than six children, some policies don't provide coverage if the homeowner cares for even one child. In one state a provider's roof suffered hail damage and a contractor was fixing it when he noticed a sign in the window that said "Day Care." The contractor told the insurance company that there was a day care business in the home and the company refused to fix the damage because the homeowner's insurance policy did not cover day care. Most Kith and Kin caregivers have no idea that they may lose their homeowners insurance coverage by caring for just one child.
There is a similar problem with car insurance if a Kith and Kin caregiver is using it on a regular basis to transport children or for other business purposes. Most car insurance policies do not cover providers who use their vehicle on a regular basis in their business or will charge high commercial insurance rates.
Contracts
Even though a Kith and Kin caregiver may believe there is no need to prepare a written agreement with the parent describing the basic responsibilities of parent payment and caregiver work hours, the lack of such an agreement can create problems. Failure by the state to pay for care on behalf of a low-income parent may leave the caregiver in the lurch unless they have a written contract that states that it is ultimately the parent's responsibility to pay for the care. A clear but simple contract can eliminate confusion and make it easier for the caregiver to enforce their agreement.
What Can Be Done
Business responsibilities are probably the last thing that Kith and Kin caregivers think about when they start caring for children. But these responsibilities won't go away, and ignoring them can have significant financial consequences. Caregivers should take advantage of the tax deductions when filing their business tax forms (Schedule C and Form 8829). Caregivers should talk to their homeowner's and car insurance agents about the impact of caring for even one child on their policies, and they should use a contract with parents. Those public and private agencies that work with Kith and Kin caregivers should share this basic business information to help them understand their responsibilities and protect themselves.
This handout was produced by Think Small (www.thinksmall.org).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2232 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Associaton for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
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Record Keeping for New Family Child Care Providers |
Family child care providers who are just getting started often have little idea about what business records to keep. Here are the key tips for new providers that will make a difference.
Unregulated Providers
Providers do not have to be licensed or regulated to claim deductions for their business. A provider’s business begins the day she is ready to care for children and is advertising she is open. After this point she is entitled to claim business expenses, even if she is not regulated. Providers who are exempt from state regulations are entitled to all the same business deductions as providers who are regulated. Providers who are in violation of state regulations can claim all business deductions except those associated with their home (property tax, mortgage interest, utilities, house insurance, house repairs, and house depreciation).
Start Up Expenses
A start-up expense is an item purchased for use in the business before the business began and which costs less than $100. Providers can deduct up to $5,000 of such start-up expenses in the year the business begins. For example, a provider who buys $2,000 worth of small toys in January 2010 and starts her business in July 2010 will be able to deduct the full $2,000 on her tax return in 2010. Start-up expenses in excess of $5,000 must be amortized over 180 months (15 years).
This means that all providers who are just beginning to think about going into business (even if they are only being paid to care for a grandchild or one unrelated child) should be saving receipts for all business related expenses.
Depreciation
Providers who purchase items costing more than $100 before their business begins are entitled to depreciate these items once their business begins. Such items can include toys, play equipment, computer, home improvements, fences, etc. Providers are also allowed to depreciate any household items that they owned before they went into business (rugs, pots and pans, bedding, household furniture and appliances, etc.) based on their fair market value at the time the business began. The rules for depreciation are complex, but it is well worth it for providers to save receipts of any such purchases and to conduct a household inventory once their business begins.
Three Key Rules
Providers who first start out can be easily overwhelmed by all the rules and responsibilities of their new business. Here are the three most important record keeping rules that a new provider should follow:
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Save all receipts associated with the cleaning, repairing, and maintaining of your home. This includes: laundry detergent, soap, paper towels, toilet paper, light bulbs, service contracts on appliances, household tools, garden supplies, broom, and so on. All of these expenses are at least partly deductible.
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Keep a record of the number and type of meals served to the children in your care. This includes any meals reimbursed by the Food Program as well as all other meals served (even if they are not nutritious). At the end of the year providers can add up all such meals and use a standard meal allowance rate to determine their business food deduction without having to keep any food receipts.
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Track all the hours you work in your home. This includes all hours children are present (from the moment the first child arrives until the last child leaves) and all the hours spent on business activities after the children are gone. These hours may include cleaning, activity preparation, meal preparation, record keeping, etc. The more hours that are recorded, the larger the percentage of house expenses that a provider can to deduct on her taxes.
There’s a lot for providers to learn about business record keeping, and many are not excited by this work. Providers should, however, understand that saving receipts and keeping good records will help reduce their taxes significantly, and that they will probably earn more per hour doing record keeping than they are earning per hour caring for children.
This handout was produced by Think Small (www.thinksmall.org).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2232 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Associaton for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
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The Tax Benefits of Becoming a Regulated Family Child Care Provider |
It is a federal law that every child care provider earning money by caring for children in their home must report their income to the IRS. Many providers do not report their income either because they aren't aware of the tax laws or because they are worried that they will owe too much in taxes. This handout shows how all providers can significantly reduce their taxes. For federal tax purposes, a child care provider falls into one of two categories:
- A provider who does not meet their state regulations is called an unregulated provider. An unregulated provider is someone who is required to meet state standards (such as licensing or registration) but does not. Although we do not recommend being unregulated, such providers should be aware that they can take many business tax deductions if they report their income. See column one of the chart. Taking deductions can greatly reduce any taxes owed.
- A provider, who does meet their state regulations, is called a regulated provider. A regulated provider is entitled to claim house expenses in column two (house depreciation, insurance, mortgage interest, property taxes, and utilities) that an unregulated provider cannot claim. A provider who is exempt from state regulations is entitled to all the same deductions as a regulated provider, but is usually not eligible to participate on the Food Program. Regulated providers can increase their net profit by joining the Food Program (see column three).
Besides claiming additional tax deductions, there are many other benefits of becoming a regulated child care provider. You can:
Join the Food Program and be reimbursed for some of your food expenses.
Obtain liability insurance to protect your business.
Join a local association of family child care providers and receive the benefits of membership.
Sign up to be listed by your local Child Care Resource and Referral agency that will refer parents to your business.
Attend training workshops and receive other support services.
Become eligible for local grant and loan programs in some areas.
This chart shows how three providers with identical expenses can have a very different net profit depending upon whether the provider is regulated or joins the Food Program.
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Unregulated Provider |
Regulated |
Regulated and |
Fill in your Estimate |
|
|
Parent fees (5 children x $70 per week |
$18,200
0 |
$18,200
0 |
$18,200
1,980 |
_________
_________ |
|
Total Income Business Deductions |
$18,200 |
$18,200 |
$20,180 |
_________ |
|
Advertising |
100 |
100 |
100 |
_________ |
|
Business interest |
20 |
20 |
20 |
_________ |
|
Office expense |
750 |
750 |
750 |
_________ |
|
Supplies |
1,000 |
1,000 |
1,000 |
_________ |
|
Laundry/cleaning |
50 |
50 |
50 |
_________ |
|
Food |
2,800 |
2,800 |
2,800 |
_________ |
|
Dues, books |
100 |
100 |
100 |
_________ |
|
Training expenses |
100 |
100 |
100 |
_________ |
|
Household items/toys |
700 |
700 |
700 |
_________ |
|
Helper |
100 |
100 |
100 |
_________ |
|
Car expenses |
372 |
372 |
372 |
_________ |
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Depreciation on $8,000 of appliances and furniture |
|
|
|
|
|
Utilities ($700 x 35% T/S) * |
* |
245 |
245 |
_________ |
|
House depreciation ($62,000 |
|
534 |
534 |
_________ |
|
Homeowner’s insurance |
|
|
|
_________ |
|
Mortgage interest($3,000 x 35% T/S) * |
|
|
|
|
|
Property taxes($600 x 35% T/S) * |
|
|
|
_________ |
|
Total Deductions Taxable Income |
6,492 |
8,636 |
8,636 |
_________ |
|
(Income – Deductions) |
11,708 |
9,564 |
11,544 |
_________ |
|
Social Security Tax |
1,654 |
1,351 |
1,631 |
_________ |
|
Federal Income Tax |
1,756 |
1,435 |
1,295 |
_________ |
|
Gross Profit(Taxable Income – Taxes) |
|
|
|
|
|
House expenses(marked With a *) that are not deductible |
|
|
|
|
|
Net Profit (Gross Profit -House expenses not allowed) |
|
|
|
|
Notes on the chart: The numbers in the chart are only estimates shown for comparison purposes. Your income and expense will vary. Not all the business deductions or tax consequences are shown on this chart. We used a 35% Time/Space percentage (T/S) representing the portion of the home used for business. We used a 15% federal income tax rate. Notice that the deductions are the same for each provider, except that the unregulated provider cannot claim expenses associated with the house (marked by a *). By losing these deductions, this provider pays more taxes. These deductions (totaling $2,144) are subtracted from the unregulated provider’s gross income because the provider had to pay these expenses anyway, even though they are not allowed as a business deduction. Also notice that an exempt provider (one who is not required to meet local regulations) can claim all of the same deductions as a regulated provider. The provider on the Food Program pays more taxes, but has the highest net profit. Every provider is better off by joining the Food Program.
This handout was produced by Think Small (www.thinksmall.org).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2232 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Associaton for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
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Seven Record Keeping and Tax Tips for the New Provider |
Family child care providers are self-employed taxpayers who must report their business income and expenses to the IRS. It is important to become familiar with all of the IRS requirements for filing your taxes. To help you prepare for this, here are ten record keeping and tax tips to help you as you start your new profession. By following these tips you will be better able to organize your records, claim the maximum legal deductions, and reduce your taxes.
1. Receipts
Keep receipts for every business expense. Your goal should be to have receipts for every penny of your expenses. Because most of the costs to clean, maintain and repair your home can be partially deducted as a business expense (light bulbs, toilet paper, garbage bags, snow shovel, etc.), collect receipts whenever you go to the drugstore, hardware store, etc. Record on your calendar when, you go on field trips or travel because of business. A canceled check may not be as acceptable to the IRS as a store receipt.
2. When can expenses be deducted?
You must report all income from caring for children even if you do not meet or have not completed local regulation requirements. You should begin deducting business expenses as soon as you begin caring for your first child, even if you do not meet local regulations. The only expenses you cannot deduct if you do not meet local regulations are expenses connected with your house (utilities, insurance, taxes, interest, depreciation and repairs).
3. Food Expenses
Because food costs will probably be your single biggest expense, you should begin keeping careful track of the number of meals you serve each day, including meals that are not reimbursed by the Food Program. Multiply these meal counts by the standard meal allowance rate to claim food expenses without having to keep any food receipts.
4. Monthly Review
Do not wait until the end of the year to collect your receipts and other records. Conduct a monthly review to make sure you have everything in order. Keep your records in one place. Use envelopes to store receipts by category of expense. Make sure receipts are labeled and can be read. If you forgot to get a receipt or if you could not get one (parking meter, garage sale, etc.), make one of your own to remind you of the expense.
5. Estimated Tax
You may have to pay some federal income tax before the end of the year. To find out if you must pay estimated tax, estimate your income and expenses through the end of the year. If you will owe $1,000 or more in taxes, you may have to pay in quarterly installments due April 15, June 15, September 15 and January 15. There are a number of exceptions to this rule. See IRS Publication 505 Tax Withholding and Estimated Tax.
6. Employees
If you hire someone as a substitute or helper in your business, you should treat this person as an employee, which means you must withhold social security and income taxes for the employee and pay employers’ social security taxes throughout the year. Many providers treat helpers as independent contractors and do not withhold taxes, but this practice is not advisable. Only someone who is in the business of providing substitute care or is doing a special service could be considered an independent contractor.
7. Household Inventory
Your house and items in your house that are used at all in your business are being worn out at a faster rate than if you were not doing family child care. As a result, you can deduct or depreciate a portion of the cost of these items as business expenses. Conduct a thorough room by room inventory and list every item (furniture, appliances, lawn mower, etc.) in your house. Consult the Inventory-Keeper for a room-by-room listing of items.
This handout was produced by Think Small (www.thinksmall.org).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2232 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Associaton for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
