Incorporating

Should a provider incorporate?

Advantages

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A corporation can hire you as an employee and deduct all wages and payroll taxes as a business expense. The corporation would file the proper federal and state payroll withholding forms. The provider would report his or his or her income as an employee on Form 1040 and not fill out any business forms such as Schedule C or Form 8829. Doing this will reduce Social Security and Medicare taxes owed because a self-employed person could not deduct his or her Social Security and Medicare taxes as an expense.

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A corporation can provide medical benefits to you as an employee and deduct these costs as a business expense. Your family could also be covered under a family medical benefit.

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Profits from a corporation are only subject to income taxes, while profits from a self-employed business are subject to extra Social Security and Medicare taxes.

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Corporate tax returns may be audited less often than self-employed tax returns.

Disadvantages

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You must pay a professional to set up your corporation and file the proper forms with the state and federal government.

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You must file separate, additional corporate tax forms each year and if you use a tax preparer; the fees to file such forms can be about twice as much as the fees to file your forms as a self-employed person.

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You must keep completely separate business and personal records, with separate checkbooks. Your business records must be organized using balance sheets and you must follow strict corporate accounting practices. This will probably take more of your time than if you were self-employed.

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You would lose house deductions (utilities, rent, house depreciation, house repairs and house insurance).

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The corporation must file all necessary federal and state payroll tax forms. If you use a tax preparer, there will be extra fees for this service.

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 There may be additional state taxes owed as an employee of a corporation as compared to a self-employed person.

As you can see, the decision to incorporate is a complex one. I believe that you should not incorporate unless you have more than one of the following characteristics:

1) Your family has high medical expenses not covered by existing insurance plans;
2) You are a person who is very good at keeping records.
3) You plan to be in the child care business for more than just a few years.
4) You have a business profit of at least $30,000.

 

The Consequences of Incorporating

There are four major ways a family child care provider can operate her business: sole proprietor, partnership, limited liability company (LLC), or corporation. The vast majority of providers set themselves up as a sole proprietor (a self-employed business). Deciding under what business structure to operate is an important and complex decision. In the end, after taking into consideration all of the factors in this decision, we believe that for the vast majority of providers the best decision is to operate as a sole proprietor.

We strongly recommend that providers who are considering a business entity other than a sole proprietorship should consult an attorney and a tax professional before making this decision. Here is a summary of the five major factors that you should use in evaluating your business entity decision:

 

Sole Prop

Partnership

LLC

Corporation

Record Keeping Complexity

lower

higher

higher

highest

Fees Owed

lower

higher

higher

highest

Control of the Business

higher

lower

higher

lower

Taxes Owed

higher

higher

higher

lower

Limited Personal Liability

higher

higher

lower

lower

The issue of limited liability is complicated. Providers who purchase adequate business liability insurance should be able to protect themselves from most business risks. Although there is somewhat more personal liability protection when you incorporate, it is necessary to keep careful records and follow many corporate formalities to obtain this protection. We believe that unless a provider has a business profit of more than $30,000 and significant personal assets that need protection, it is not necessary to choose any other business entity beside a sole proprietorship.