Child Care Home: Financial Records, Fees, & Taxes

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1 Child Care Home: Financial Records, Fees, & Taxes Marilyn Burns Home-Based Business Specialist Oklahoma State University Child care providers are often more concerned with nurturing children than thinking about business policies. Being in business, however, should not only be a rewarding experience with children, but a profitable experience as well. Before you advertise your child care services, organize your financial records by carefully: - estimating your expenses, - figuring your potential income, - setting your fees, and - learning to handle taxes. Taking care of children is a business and your child care home should be run like a business. The hard facts tell us that half the people who are in the child care business today will not be in business next year. The 30 to 32 percent turnover rate of child care providers reflects the inability of many private facilities to survive economically. As in any business, the most successful people tend to be those who like what they are doing and know how to manage their business in an organized way. FINANCIAL RECORDS You must become a paper person, as well as a people person, to make your business a success. The paperwork part of a business is often a challenge, but is not overwhelming if you plan ahead. Adopt a recordkeeping system that is easy and quick right from the beginning that will provide the facts that you need. Many new business owners report that they hire professionals to initially help set up their bookkeeping, and then prepare the IRS forms when they are due. You may find this small investment saves money in the long run. Organize your records with your taxes in mind. Complete, accurate, and ongoing records are a must to a smooth business operation and peace of mind. You are required to keep your business records and receipts for three years from the date you file your tax return. As a child care provider, you may want to apply for a tax identification number to be used on all business and tax forms instead of your social security number. This number is the Employer Identification Number (EIN) issued by the IRS. As you begin, select a form and method of recordkeeping that is comfortable for you to use. One method is called Calendar-Keeper. This is a commercially developed system based on the use of a calendar and includes forms for recording expenses, attendance, payments, and mileage. The concept is to keep all related business

2 information in one place. If you are looking for a simple method for recording both income and expenses, you might consider using the "Monthly Record of Income and Expenses" (located in this unit). Columns for expenses are divided into two categories: direct and indirect. Direct expenses are those costs involved strictly for your business, and indirect expenses are shared between the business and your family. Making this designation in your recordkeeping routine will help you determine IRS tax deductions at reporting time. ESTIMATED EXPENSES: DIRECT DEDUCTIBLE You will need to estimate your expenses before you open your business. If you don't do some planning with pencil and paper before you quote a fee, you may find out too late that you are not making any money. You may also want to plan an additional amount for unexpected expenses and possible loss of clientele for a period of time. Add up all the costs. Some expenses will be one-time costs only (fire extinguisher, bulletin boards). Others are yearly expenses, like payment of your liability insurance. But most items are on-going costs (food, field trips, paper products, and other consumable items) that appear on your monthly records of expenses. These expenses will be "used up" during the year and should be deducted within that tax year. Here is a partial list of direct expenses that are possible tax deductions: Food (including infant formula); Toys, games, and arts and crafts supplies; Transportation (mileage); First aid supplies; Laundry and cleaning; Office supplies; Bank charges on business account; Legal and bookkeeping assistance; Insurance; Advertising; Personnel (owner and substitute salaries and fringe benefits); Dues, fees, subscriptions, and training materials (professional development); and Cost of training for extra child care, such as special needs children. Some direct costs, such as large toys, small appliances, bedding, office and safety equipment, may last longer than one year and may be considered as an expenditure over a number of years. ESTIMATED EXPENSES: INDIRECT DEDUCTIBLE Identify and record the expenses that are used both in your business and by your family. Examples of some of these expenses include: Mortgage or rent,

3 Utility payments, Property taxes, Phone bill, Maintenance and repairs, House insurance, Household supplies and toys, and Cable TV Only a percentage of these expenses are deductible. To figure the correct percentage, use the time-space percentage formula [below]. A. Calculate your time percentage. Keep a record of all your business related activities. In addition, count the hours you spend doing business-related activities when children are not present. This includes time spent cleaning, cooking, activity planning, recordkeeping, interviewing, and phoning. Time you cannot count includes hours spent away from home while doing business related activities (shopping for food) and hours spent doing general house repairs and maintenance. Making a note on a calendar is an easy way to keep an accurate record of how you spend your time. 1. Figure the amount of time your house or apartment is used each week for child care business. If you plan a one week vacation each year multiply a weekly total by 51. For example: child care (7 a.m.-5 p.m.) 50 hours/week clean up 5 cooking 2 planning 1 recordkeeping 2 phone 1 TOTAL 61 hours/week 2. Multiply numbers of hours per week by 51 weeks to get number of hours per year. Also add in overtime and the number of hours spent on interviews. For example: 61 hrs/week x 51 weeks = 3,111 hrs/yr Interviews/overtime, etc. = 110 hrs/yr TOTAL 3,221 hrs/yr 3. Divide the number of hours per year for child care business by the number of hours per year to get your time percentage. 3,221 child care hours/year 8,736 total hours/year B. Calculate your space percentage. According to the IRS, business space is defined as space "...that is available for day care use throughout each business day and that is regularly used in that business." Space does not have to be used every business day for it to be considered "regularly" used for business. But a room ordinarily restricted from child care use and used occasionally for the business is not considered "regularly" used for business. For example, if one bedroom is used two

4 hours each day for naps, the space may be counted as regular business use. If another bedroom is used only when a child is sick (two or three times a month), then the space is not counted as being used on a regular basis. A care provider might use between 80 to 100 percent of the home. If 25 percent of a storage area is used for the business, it may be counted. If the laundry for the business is done on a regular basis in the laundry room, that area can be added. Don't forget to include the entry way, hallways, porches and decks, and the garage, if toys and equipment are stored there. 1. Figure the total square footage of your home. For example: 2,000 square feet. 2. Add up the square footage of each room and area used regularly for your business. For example: 1,800 square feet. 3. Divide the number of square feet used in child care by the total house space. 1,800 square feet used 2,000 total square feet C. Calculate your time-space percentage. The majority of care providers claim between 25 percent and 40 percent. Be sure you have the records to back up your claim for business deductions. Use IRS form 8829: Expense for Business Use of Your Home to report your time-space percentage calculations. Multiply the percentage of child care hours by the percentage of child care use of space. 37% (.37) x 90% (.90) = 33% time-space In this example, 33 percent of household expenses can be claimed as child care business when you are computing your income tax deductions. If your electric bill is $100 for March, multiply that by 33 percent ($100 x.33 = $33). This is the amount you can deduct for that month as an indirect business expense. TIME-SPACE PERCENTAGE FORMULA TIME (Number of hours your home is used in business in a year divided by Total number of hours in a year) MULTIPLIED BY SPACE (Number of square feet of your home that is used for business divided by Total number of square feet in home) EQUALS Time-Space Percentage POTENTIAL INCOME

5 Income for your child care operation will be determined by the type of program you direct and your eligibility for support services. You will need to take into consideration several factors, such as the age and number of children, your location, and competition. Possible income sources include the following: - Fees and tuition (paid daily, weekly, or monthly); - Enrollment or application fee; - Supply fee (collected at times during the year); - Government support (Department of Human Services - children with special needs/usda Child Care Food Program); - In-kind contributions (space, equipment, supplies from a church, hospital, or community organization); and - Other (cash contributions, fund-raising activities, and grants). According to the Children's Foundation, Washington, D.C. (1991), child care costs for the average working family vary according to the age of the child and the kind of care. The cost for one child in a child care situation might range from $2,400 to $9,000 per year. The average cost nationwide is $3,040 per year. SETTING FEES Estimating your expenses and analyzing your potential income gives you the background information you need to set your fees. As a general rule, the fee in a service business is based on three things: - A salary for the worker (owner), - The cost of operation, and - A profit margin. Your goal should be to operate with a decent wage and still make a profit. The "going rate" in your area is one place to start as you determine fees. Charges will vary considerably according to the following factors: - Region of the state or area of town - In rural locations the fee may be $45 a week per child, while in affluent urban neighborhoods the rate may be $85 a week or more; - Ages of children - Charge more for infants because they take more care; - Children in the same family - Offer a lower rate for the second or third child because there is slightly less paperwork; - Hours of care - Charge more for night and weekend care, and for early arrival or late departure;

6 - Special services - Charge for extras, such as washing diapers, giving physical therapy, offering field trip experiences, consultation, or feeding extra meals; and - Special needs children - Most providers charge more for caring for children with special needs and the state program reimburses for their care. However, don't be afraid to ask above the "going rate" if you find you are not making a decent wage for yourself. Determine the hourly value of your time. This should be at least minimum wage, preferably above. Let's assume that you care for children from 7 a.m. to 5 p.m. or 10 hours a day. If you figure your time at $5 per hour, your daily salary will be $50. If you care for seven children with operating costs of $20 per day, add the two together to get your daily expenses ($70). If you charge a fee of $50 per week per child, you will cover your costs ($350). If you operate your child care home 51 weeks, your annual salary will be $17,850. Children X $/week X weeks = annual income 7 X $50 X 51 = $17,850 This tight budget covers your expenses and allows you to break even, but does not allow for profit or the possibility of less than full enrollment throughout the year. No allowance has been made in this example for including the wages of outside employees or family members or the charges of independent contractors. For additional information, read "Basic Guide to Family Child Care Record Keeping" or check with the IRS on ways to handle assistant's pay. National figures indicate that parents pay between $50 and $150 per week per child. Experiment with figures above the minimum to achieve your expectations, yet be realistic for your situation. Remember, you have a very important job and are providing a valuable service. Establish a reputation for providing high quality child care - people will be willing to pay more for your services. TAXES Tax records are serious business. Most of the income you receive from your child care business will show up on other people's tax returns. Parents use these figures to determine their allowable child care credits. This may make your income very visible to the Internal Revenue Service - more so than other types of income. Therefore, you should be very careful to report all receipts from your business. Accurate records are vitally important. You must keep records on all aspects of your business in case you ever have an IRS audit. Remember to keep information on the following: Food purchases - To justify food expenses, the IRS may look at grocery receipts, copies of menus, and children's attendance records. Automobile expense - Written evidence of business related travel should include date, destination, reason for trip, odometer readings at start and stop of each trip,

7 and miles driven (see Sample I). Check on current rate for IRS mileage deduction and multiply by number of child care business miles driven for the year for your deduction. Direct and indirect expenses - Provide receipts and copies of bills of all related costs (see Sample II). Some of the items you purchase for the operation of your business may cost more than $100 and can be depreciated on your taxes. These items may include a swing set or refrigerator which generally cost more than $100 and are not used up in the year in which they were bought. To figure depreciation, check with the IRS to see whether they consider the item a three-year, five-year, or 10-year property. The tax deductions will be calculated over a period of years for both direct and indirect expenses. For more information, contact the Internal Revenue Service or pick up the following tax forms and publications at your local library. Toll-free telephone numbers are in your telephone directory. IRS Forms: 1040 Basic Personal Tax Return Form 1040C Profit or Loss From Business 1040ES Estimated Tax 1040SE Social Security Self-Employment Tax W-10 Dependent Care Providers Identification and Certification 4562 Depreciation and Amortization 2441 Child and Dependent Care Expenses 8829 Business use of Home IRS Publications: #334 Tax Guide For Small Business #587 Business Use of Your Home #534 Depreciation #533 Self-Employment Tax #583 Taxpayers Starting a Business #917 Business Use of a Car RESOURCES "Calendar-Keeper" "Basic Guide to Family Child Care Record Keeping" "Family Child Care Tax Workbook" Redleaf Press, 450 No. Syndicate, Suite 5, St. Paul, Minnesota Phone: BASICS OF A SUCCESSFUL FINANCIAL OPERATION

8 Decide on a budget year - January to December? or October to September? Establish a bank account for the business. Transactions by check provide documentation for business records. Organize a work area where you can do your recordkeeping. Select a convenient method for storing your records, such as an attaché case, portable metal file box, or a small file cabinet. Use a notebook, ledger, or calendar system to record income and expenses. Store receipts in labeled envelopes. Set a regular time each day or week to record business information. Complete a monthly summary at the end of each month. SAMPLE 1 Business Mileage Record for Day Care Date Place Driven Purpose Beginning Mileage Ending Mileage Total Mileage SAMPLE 2 Monthly Record of Income and Expenses for Day Care Month Year Create your own Chart to record the following information. Date Repairs Description of income/expense Income Food & Supplies Direct Child Care Expenses Indirect Expenses Equipment Home Other Utilities Equipment Other Maintenance

9 Subtotal of Expenses (Food) (Repairs & Supplies) (Equipment) (Home Maintenance) (Other) (Utilities) (Equipment) (Other) Income (Total) Direct Child Care Expenses (Total) Indirect Expenses (Total) Source: Family Day Care: A Home-Based Business. University of Maine, Cooperative Extension. DOCUMENT USE/COPYRIGHT National Network for Child Care - NNCC. Part of CYFERNET, the National Extension Service Children Youth and Family Educational Research Network. Permission is granted to reproduce these materials in whole or in part for educational purposes only (not for profit beyond the cost of reproduction) provided that the author and Network receive acknowledgment and this notice is included: Reprinted with permission from the National Network for Child Care - NNCC. Wilson, E. & Burns, M. (1993). Financial Records, Fees, and Taxes (HBB7-4). In Child care home. Stillwater, OK: Oklahoma State University Cooperative Extension Service.