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A 2022 Tax Guide for Childcare Providers

With organization and preparation, you can ensure your childcare business is ready to file before your deadline.

A 2022 Tax Guide for Childcare Providers

A 2022 Tax Guide for Childcare Providers

It’s time to file your taxes. No matter how many times you file your taxes, the process always feels daunting. Which forms do you need? What tax deductions are available for childcare providers? You’ll need to organize your documents, receipts, and more. You’ll need to figure out which expenses can receive a tax deduction. The process may be intricate, but it’s doable with a little organization and preparation.

Our guide features all the information you’ll need to start filing your taxes: 2023 filing deadlines, information on eligible tax deduction expenses, and a document checklist.

glasses on top of tax documents

Source

How to prepare taxes

During preparations, you should first decide whether you’ll file your taxes yourself or use a preparer. Before handing over your business information to a tax preparer, make sure they have an active preparer tax identification number (PTIN) that allows them to prepare, calculate, and file tax returns on behalf of individuals or businesses and receive compensation for their services.

Tax season is all about preparation. At the center of this process are organization and documentation. To prepare for your taxes, you’ll need to keep track of your daycare’s income and expenses. While you can do this at the end of the calendar year, you can save time by categorizing and logging payments and receipts as they come up.

Tax deduction for daycare

The IRS offers childcare providers deductions and credits based on eligibility. Deductions can reduce your taxable income before you calculate the tax you owe, while credits can reduce the amount of tax you owe. In operating a daycare, certain business expenses are tax deductible that you can claim when filing your taxes.

Some daycare business expenses that childcare providers are allowed to deduct include the following:

  • Supplies: Daycare supplies are tax deductible if necessary to your business operation. These items are generally used for one year, and you need to claim these products during the year of purchase with receipts. Eligible items may include things like crayons, nap mats, and cleaning supplies. 
  • Vehicle expenses: Depending on the number of qualified business miles you drive, you may be eligible to deduct your vehicle expenses. This mileage may include transporting the children in your care on field trips, running errands related to your business, and traveling to and from career-advancing classes. Vehicle expenses may also include any parking fees you paid while doing a daycare-related activity.
  • Capital services: Unlike ordinary daycare supplies, capital services are items that often last for more than one year. These purchases such as cribs, furniture, and playground equipment, have different rules for claiming than ordinary supplies. 
  • Meals: Daycare businesses can deduct the cost of meals provided to children. The government provides standard meal rates for breakfast, lunch, dinner, and snacks. These rates will be calculated with attendance and how many meals your daycare provides. Childcare providers also have the option to deduct the actual cost of food if higher than the standard rates; however, documentation is required for all food purchases. Food deductibles don’t include nonfood supplies. These items would be filed under supplies.
  • Payroll: Employee payroll is a business expense that is tax deductible. This includes wages, salary, and employee benefits.
  • Business fees: Daycare providers may deduct business-related fees when filing taxes. The types of fees vary; however, they could include childcare licensing fees or dues, legal or accounting fees, and bank fees.

Other expenses that may be considered tax-deductible for childcare providers include:

  • Advertising
  • Daycare membership or subscription expenses
  • Insurance
  • Phone and internet service
  • Professional development

Home-based daycare providers can get a tax deduction for using their home. These providers are spared from exclusive use—the space is used solely for business—if licensed, certified, registered, or approved as a daycare provider under state law. If they don’t currently meet these requirements, they must have a pending application as a daycare provider that hasn’t been denied or be exempt from licensing, certification, registration, or approval under state law.

If your daycare can claim business-use-of-home expenses, you can claim some of the expenses used to operate and maintain your home. Deductible expenses may include things like the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, maintenance, and repairs.

Daycare receipt

During tax season, not only will you have to provide your business income and expense information to the government, but you’ll also have families requesting daycare receipts. A daycare receipt is a document provided to families that totals their childcare payments from January 1 to December 31 of the previous year. Parents and guardians need this information to claim the expense on their taxes and receive a tax credit. 

The Child and Dependent Care Tax Credit is a tax break specifically for working people to help offset the costs associated with caring for a child or dependent with disabilities. Rather than a deduction, which reduces the amount of taxable income, this is a tax credit that reduces taxes owed. Families can save hundreds or thousands of dollars by claiming their childcare expenses.

Below is a sample template for use by childcare providers created by the IRS:

 

<Insert Today's Date>

<Insert Parent/Guardian’s Name and Address>

 

Re: <Insert Child's Name>

To Whom It May Concern:

 

Our records show we provided service(s) to <Child's Name> at <Name of Care Provider> on the following date(s) <Insert the Date(s) You Provided Service(s) for the Tax Year On the Notice>.

Our records reflect that the child lived at <Street Address, City, State, Zip Code (if the child moved during the year show all addresses)> during this time. Our records also reflect that the child’s parent or guardian during this time was <Insert Parent's or Guardian’s Name(s)>. The child’s parent's or guardian's address of record during this time was listed as <Insert Parent's or Guardian’s Address(es)>.

Sincerely,

<Insert Signature of School/Day Care Official>

<Insert Title of School/Day Care Official>

<Insert Phone Number of School/Day Care Official>

 

To fulfill the rest of this document’s purpose, ensure you include the amount received for the childcare services. 

You should provide these documents to your families as soon as possible so they have ample time to file their taxes.

Tax filing deadlines

Although April 15 is often recognized as national tax day, businesses have different deadlines based on their structure. Below you’ll find the filing deadlines, outlined by the IRS, for the following business types: sole proprietor, partnership, S corporation, and corporation.

Sole proprietor

A sole proprietor is someone who owns an unincorporated business by himself or herself. If you’re the sole member of a domestic limited liability company (LLC), you aren’t a sole proprietor if you elect to treat the LLC as a corporation. 

Tax filing deadline: The 15th day of the fourth month following the end of the tax year—generally April 15.

Partnership 

A partnership is a relationship between two or more people to do trade or business. Each person contributes money, property, labor, or skill and shares in the profits and losses of the business. 

Tax filing deadline: The 15th day of the third month following the end of the tax year—generally March 15.

S corporation

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. The shareholders report the income and losses on their personal tax returns, and taxes are assessed at their individual income tax rates. 

Tax filing deadline: The 15th day of the third month following the end of the tax year—generally March 15.

Corporation

A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders. In forming a corporation, prospective shareholders exchange money, property, or both for the corporation’s capital stock. Corporation profits are taxed when earned and then taxed to shareholders when distributed as dividends. 

Tax filing deadline: The 15th day of the fourth month following the end of the tax year—generally April 15.

When a tax filing due date falls on a weekend or legal holiday, the due date is extended to the next business day. The 2023 filing deadline for partnerships and S corporations is March 15, 2023. Sole proprietors and corporations must file their taxes by April 18, 2023.

Tax preparation checklist

Filing your taxes can be challenging; however, the right checklist can make the process easier. To prepare for your taxes, you’ll need to:

  • Find out when your taxes are due.
  • Gather the appropriate tax forms.
  • Collect your business income records.
  • Gather your receipts for business expenses.
  • Request an extension if needed.

 

Use the list below to compile the necessary documents you’ll need to file.

General

  • Federal tax ID number
  • Social security number
  • Previous tax returns (up to three years)

 

Business income tax

  • Financial statements
    • Income statement
    • Balance sheet
    • Bank and credit card statements
    • Bank deposit slips
    • Accounting documents

 

Business-related expenses

  • Grouped receipts
    • Supplies
    • Recurring operational costs
      • Rent
      • Utilities
      • Subscription-based services
    • Entertainment/travel
    • Advertising and marketing
    • Professional fees: accountants, attorneys, consultants, and more
    • Insurance policies: individual and group plan documents, company vehicle policies, etc.
    • Equipment and assets
      • Depreciation schedules

Employment tax forms

  • Tax forms
    • Form 1040: Annual income tax return for individuals
    • Schedule C: Report income as a sole proprietor with Form 1040
    • Schedule K-1: Report income for pass-through entities (S corporation or partnership)
    • Form 1120-S: Report income for an S corporation
    • W9: Employee tax withholding certificate
    • I-9: Verification of employee's legal working status
    • W-2: Wage and tax statements for each employee
    • 1099: Nonemployee tax form
    • 1099-MISC: Summary of fees and payments for nonemployees
  • Payroll reports
  • Gross monthly payroll
  • Total deductions withheld from employee gross wages

 

In-home documentation

  • Total square footage of home
  • Business use area square footage
  • Mortgage, interest, or rent paid
  • Utilities
  • Insurance policy

Start as early as possible

Tax season is here. As a childcare provider, it’s time to gather all your business documents that show your annual income and expenses. Throughout this process, don’t forget about offering daycare receipts to parents hoping to receive a tax credit. Organization and documentation are two key factors that will get you through this process, so make sure you pay attention to your filing deadline, use the checklist above to collect all necessary paperwork, and start your taxes as soon as possible.

This blog post is intended to provide general information designed to educate a broad segment of the public about tax preparation. Before taking any action, please always seek the assistance of a tax professional who knows your particular situation for advice on taxes or any other matters that affect you and/or your business.

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