Let's say you and a parent come to an understanding: You agree to charge the parent less if the parent agrees not to claim the child care tax credit on the fees she paid you. At the same time you don't report this money as income on your taxes. Legal? No!
Sometimes these agreements occur when the provider is operating illegally, or trying to cheat the IRS, or the parent is an undocumented immigrant.
In any situation, however, money you receive from parents for child care is taxable income and must be reported on IRS Form 1040 Schedule C. If you fail to report all of your income there are several ways you can get caught:
* A parent who previously agreed not to claim the child care tax credit may decide later to go ahead and claim the credit when she realizes how much it can be (the maximum is $1,050 for one child). The parent can claim this credit even without having an identification number from you by following the instructions on IRS Form 2441 Child and Dependent Care Expenses. If the parent does claim this credit without your identification number, this could cause the IRS to audit you.
* If you are audited by the IRS they will look at your Food Program records to see how much you receive as income from this program. If you claimed a child on the Food Program the auditor will want to see the income reported from the parent of each child.
* If you are audited by the IRS you will be asked to produce copies of all bank statements so they can match your business income with your bank deposits. If you deposited money from a parent into a bank account and did not report this as income, the IRS will spot this.
The IRS knows that some family child care providers do not report all of their business income on their tax return. The first thing they will look for in an audit is evidence of unreported income. Don't make the mistake of trying to hide your income. If you properly report all your income and claim the many allowable business deductions, then you will pay only what taxes you owe and you won't have to fear an IRS audit.
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For more information about reporting income and claiming deductions, see my Family Child Care Record Keeping Guide.
Copyright 2010, Tom Copeland, www.tomcopelandblog.com