Tom Copeland's Taking Care of Business

I Made a Mistake on My Tax Return - Should I Amend it?

Tax season is finally over. Yet, you now realize you made a mistake when filing your taxes. Should you amend your tax return?

As a family child care provider you shouldn't hesitate to amend your return. Your chances of being audited do not increase when you amend. Don't be shy about amending your tax return!

Use IRS Form 1040X Amended U.S. Individual Income Tax Return. You cannot e-file an amended return. I describe how to fill out this form, line-by-line in my 2012 Family Child Care Tax Workbook and Organizer.

You should amend your tax return if you forgot to report all of your income, you didn't claim all the hours you worked or all the meals you served, or didn't deduct all of your allowable expenses.

For every $100 of business expenses you claim on your amended tax return, you will probably get a refund of between $30 and $40.

Generally, you must amend your return within three years from the date you filed your original tax return or within two years of the date you paid the tax, whichever is later. If you filed your 2010 taxes on April 1, 2011, you have until April 1, 2014 to amend your tax return.

Additional Rules to Follow

1) Do not amend your return if you made a mathematical error. The IRS will catch this mistake and correct it for you.

2) When filing Form 1040X, attached copies of any schedules that have been affected by your change. In other words, if you are adding additional repair expenses on Schedule C, attach a revised copy of Schedule C Profit or Loss From Business, Form 1040-SE Self Employment Tax, and Form 1040 U.S. Individual Income Tax Return. If you are adding some additional hours, also include Form 8829 Expenses for Business Use of Your Home. Don't resend your original tax forms.

3) If you are amending for more than one tax year, file Form 1040X for each tax year and mail them to the IRS in separate envelopes.

4) If you owe additional taxes, file Form 1040X as soon as possible to minimize interest and penalties.

5) If you are claiming an additional refund, wait until you have received your original tax return before filing Form 1040X. You may cash your original refund check while waiting for the additional refund.

New IRS Tracking System

It normally takes the IRS 8-12 weeks to process an amended tax return. You can check the status of your return online three weeks after your file your amended return. Go to www.irs.gov and search for "Where's My Amended Return?". You can also call 866-464-2050. This online and phone service is also available in Spanish.

State Tax Return

Amending your federal tax return may also require you to amend your state tax return.

Working with Your Tax Professional

If you are amending your tax return because of a mistake made by your tax preparer, you should ask your tax preparer to pay for the cost of amending the return. For example, you gave your tax preparer a list of the number of hours you worked in your home, but he/she did not report them all. If you didn't tell your tax preparer about a new couch you bought, you should expect to pay the cost of amending your return.

It may be that the cost to amend your tax return will be greater than any refund you will receive. If that's the case, don't amend.

See also my article "If I Amend My Tax Return Am I More Likely to Be Audited?"

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For additional information on how to amend your tax return, see my book 2012 Family Child Care Tax Workbook and Organizer.

Tom Copeland Talks About New Tax Rules on Bam Radio Network

I recently taped a radio interview on "New Tax Rules for Providers" in which I discussed changes in tax rules for 2012 and 2013.

You can listen to the ten minute interview here.

For 2013 I discuss the standard mileage rate, standard meal allowance rate, 50% bonus depreciation rule, and the new rule that will allow providers to claim house expenses without any records.

The interview was conducted by Linda Geigle, Executive Director of the National Association for Family Child Care.

Their annual conference will be held July 18-20th at the Fairmont Princess Hotel in Scottsdale, Arizona. See more details.

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April 16th Webinar - Legal Issues

Can you refuse to provide care to a child who has epilepsy because you are afraid that you won't know what to do if the child has a seizure?

Should you incorporate your business to reduce the risks of a lawsuit by a parent?

Can you refuse to let the father pick up his child because the mother does not include him in her authorized pick up list?

These and many other questions will be answered during my April 16th webinar on "Legal Issues."

I will cover how you can protect the children in your care, your property, and yourself from the increased risks associated with caring for children in your home.

Topics include: custody disputes, child abuse, price fixing, Americans with Disabilities Act, legal and illegal discrimination, and how to choose a business structure.

The webinar starts at 8:30 pm Eastern time. During the 1 1/2 hour webinar participants will watch a power point on their computer and listen to me explain how you can reduce the risks of running your business. You'll have the opportunity to ask me questions live and you will receive a copy of the power point, plus handouts.

If you've never attended a webinar from your home you've missed out on a fun learning opportunity!

The cost is $25 (100% tax deductible!) if you are a member of NAFCC ($60 for nonmembers) Membership in NAFCC is $35 a year. For questions, contact Mandi Hardy at 801-886-2322 (ext. 225); businesstraining@nafcc.org. To register.

If you are not a current member and would like to take advantage of the many wonderful benefits that NAFCC has to offer, please visit the website http://www.nafcc.org and click "join now" under the membership tab.

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For more information on legal issues, see my book Family Child Care Legal & Insurance Guide.

Early Bird Registration Ends June 8th for NAFCC Annual Conference

Join me in Scotsdale, Arizona July 18-20th for the annual conference of the National Association for Family Child Care.

A discounted early bird registration deal ends June 8th. See details.

I'll be presenting two pre-conference train-the-trainer seminars Thursday the 18th on: Successful Strategies for Marketing Your Business and Mastering Record Keeping and Taxes. For further information. 

These four hour seminars are for trainers and providers who want to get more in depth knowledge about the topic. A copy of my book, power point and handouts are included.

I will also be presenting several workshops during the conference, including one on Record Keeping and Taxes for 2013: How to Save Time and Money. 

The NAFCC conference will be held at the Fairmont Scotsdale Princess. For a copy of the conference schedule, click here.

I always enjoy this conference where hundreds of family child care providers from across the country come to learn and have fun.

Image credit: www.nafcc.org

How to Hire Your Own Children Under Age 18

There are advantages to hiring your own children under age 18 to help you with your family child care business.

But, there are also pitfalls you want to avoid so you won't run into trouble with the IRS.

First, the advantages:

* Your children can reduce your workload by helping you care for the day care children, cleaning up after the children, cooking, or doing a variety of other tasks.

* You can pay your children and deduct their wages as a business expense. And depending on the amount you pay, the child may not owe any taxes on what they earn. This can result is a big tax savings for your family.

Next, the pitfalls:

The IRS is naturally suspicious of family child care providers who hire their own children for their business. They assume that some child care providers are not following the rules when hiring their own children and thus are not entitled to the tax benefits.

Non-Tax Rules 

If you want to be able to deduct the amounts you pay your own children you need to keep proper paperwork to show that the money you paid your child was for work and was not an allowance. This means:

• Prepare a job description that details what are the responsibilities of the job:  play with the children, clean up before and after the children, prepare meals for the children, clean toys, record keeping, etc.  Do not include more personal activities such as shopping, mowing the lawn, running family errands, etc. Don't count any work for any activity that would still be done if you weren't in business.

• Prepare a written agreement between you and your family member that describes the employment arrangement:  days and hours of work, pay, etc.  Both parties should sign this agreement.

• Keep a daily record of when the work was done.  If the work done is the same every day, simply record the days and hours worked:  Monday 9am - 10am, Tuesday 9am - 10am, Wednesday 9am - 10am, etc.

• Write out a receipt for each payment, get the family member to sign it, and keep a copy:  "Payment of $25 cash for 5 hours of work January 3 - 7, 2013."  It is not necessary to pay by check; you can pay with cash.  Make this payment out of a separate business account if you have one. You could also compensate your child by buying them clothing, movie tickets or other items.

• Payments to family members must be reasonable.  If you have a $15,000 business profit, it is unreasonable to pay your own children $6,000 in wages.  Payment of $20 per hour to your 15 year old is also unreasonable.  The test of what is reasonable is probably how much you would be willing to pay someone who is not a family member. If you also give your child an allowance, keep a record of when you gave this allowance and how much it was. The federal minimum wage is $7.25 per hour. Although you are not required to pay this amount, it should be considered a reasonable wage for any child.

• Federal child labor laws make it illegal to hire anyone to work for you if they are under age 14. This law doesn't apply when hiring your own children. But, check to see if your state child labor laws apply to hiring your own children.

Tax Rules

• Get a taxpayer identification number (EIN) from the IRS (Form SS-4 can be filled out online at www.irs.gov).

• You don't have to withhold any federal or state income taxes.

• If your child is under age 18 you do not have to withhold or pay Social Security/Medicare taxes.

• You don't have to pay any federal unemployment taxes. Check with your state to see if you must pay state unemployment taxes.

• If your child earns less than $5,950 (2012 amount) from all jobs they have inside or outside the home, he/she does not have to file a tax return or pay any federal income taxes.

• File IRS Form W-2 and W-3 at the end of the year to report what you paid your child. You don't pay any taxes when filing these forms. Failure to file these forms shouldn't impact your ability to deduct the wages you paid as a business expense. But filing the forms do help show the IRS that you have an employee.

• Update: Some child care providers and tax preparers file the quarterly IRS Form 941 (or the annual 944) as another way of showing that they are treating their own child as an employee. These forms are normally filed to pay Social Security/Medicare taxes. When you hire your own children under age 18 you won't owe these taxes and therefore it's not required that you file these forms. I've had some providers tell me that when they filed these forms the IRS assumed they owed money and wrote letters requesting they pay. After some correspondence the IRS backed off. I've heard from others that they never had this problem. To be on the safe side you may want to file these forms.

• You don't have to pay your child the federal minumum wage of $7.25 per hour. Check with your state (Department of Labor) to see if you must pay any state minimum wage.

• Check with your state to see if you must purchase workers' compensation insurance.

Conclusion

Many child care providers have their own children work for them, but don't pay them anything. It's okay not to pay your children! You can reward your children by giving them gifts or their help can be considered an expected household chore. If you do this, the gifts are not a business expense.

If you want to be able to deduct the amounts you pay your children you must follow the rules cited above. Although the paperwork can be intimidating, the tax benefits are real.

There is also a handout on this topic.

Here's my article on hiring your spouse or your own children who are age 18 or older.

Thanks to Alison Jacks and Kelly Nokleby.

Tom Copeland - www.tomcopelandblog.com

Image credit: www2.lanecc.edu

For more information on hiring your own children, see my book Family Child Care Tax Workbook and Organizer.

Estimated Taxes Due April 15th

April 15th is the deadline for family child care providers to file your federal estimated tax payment for the first quarter of 2013.

This comes as a shock to some child care providers because it's the same deadline for paying your 2012 taxes.

Most child care providers do not need to file estimated taxes (IRS Form 1040 ES Estimated Tax for Individuals). This is because their spouse usually has enough withheld in taxes to cover them.

Child care providers who most likely need to file estimated taxes are those who are single or who have a spouse who is unemployed or self-employed.

If you are not sure if you or your spouse has paid in enough taxes for the months of January, February and March, you should make a tax payment with this form. You goal is to have paid in at least 90% of the taxes you owe for this quarter to avoid paying a penalty. If you pay in too much you will get a refund.

How do you know how much you will owe in taxes? If you were in business in 2012 use last year as a guide. If this is your first year, use 20% of your gross income (parents fees plus Food Program income) as a conservative guess of how much you will owe.

Lastly, check your records to see if you will owe any state income taxes. If so, make a state estimated tax payment by April 15th as well. The second quarter for estimated taxes covers the months of April and May. The deadline to file for the second quarter is June 15, 2013. Yes, these quarters are not equal!

Tom Copeland - www.tomcopelandblog.com

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For details on how to file your estimated taxes, see my book 2012 Family Child Care Tax Workbook and Organizer.

I Don't Think I Can File My Taxes by April 15! What Can I Do?

It's almost April 15th and you haven't filed your family child care tax return yet. Don't panic. If you need more time you can file for a six month extension.

Sometimes child care providers need more time to calculate their depreciation deductions, sort out their records, or deal with a family emergency. However, you don't need to give a reason when you file for an extension.

File Form 4868 Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. This will give you until October 15th to send in your tax forms.

By filing Form 4868 you do not have more time to pay the taxes you owe. They are still due on April 15th. If you don't know how much you will owe, pay what you estimate you will owe with this form. If you underestimate this amount, you will owe interest on the unpaid taxes.

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Four Tax Questions Answered

The April 15th tax deadline is almost upon us. Here are some tax questions I've received from family child care providers recently:

1) Can I deduct my monthly mortgage payment?

No. You can deduct your mortgage interest on IRS Form 8829 Expenses for Business Use of Your Home, line 10, column b (indirect expense). If your Time-Space Percentage is 35% you would deduct 35% of your mortgage interest on Form 8829 and 65% on Schedule A if you itemize.

You are able to capture the principle payments (that are part of your monthly mortgage payment) when you depreciate your home on Form 8829. See my article "How to Depreciate Your Home."

2) Can I deduct 100% of my family child care union dues?

Yes. In some states family child care providers have organized into unions and pay monthly union dues. These expenses can be deducted on IRS Form Schedule C, line 17 Legal and Professional Services. Some child care providers are not a member of a union, but are having "fair share" fees deducted from the payments they receive from the county for caring for children from subsidized families. You cannot deduct these "fair share" fees as a business expense. Instead, you are receiving less income and, as a result, you will pay less in taxes.

3) Can I deduct expenses for lawn maintenance such as a lawn mowing service or landscaping service?

Yes. Multiply the cost by your Time-Space Percentage.

4) I bought some clothes (t-shirts, gloves, coats) for my day care children. Can I deduct this?

It depends. If these items are given to the children for them to take home they would be considered "gifts" and are subject to a limitation of $25 per child, per year. There is a difference between a "gift" and an "activity expense." See my article on this. If these items were purchased for the children but kept in your home so they can be used by other children, then there is no $25 gift limitation and the items could be fully deducted as an activity expense.

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For a list of over 1,000 items that could be deducted in your business, see my Family Child Care Record Keeping Guide.

Links to Business Resources

I've created a new Resources section on my blog where you can find links to a variety of organizations that can help you become more successful as a business.

There are four key organizations that every family child care provider should be connected to:

    * Child Care Resource & Referral agencies

    * Family child care associations

    * Family child care licensing agencies

    * Family child care Food Program sponsors

In addition, I've posted links to a number of other organizations that you may find helpful. I will post additional links in the future.

What other organizations or resources should I link to here?

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How to Depreciate Your Home

Every family child care provider who owns a home should depreciate it and claim a substantial tax deduction.

I've written a previous article about why you should never listen to anyone tell you not to depreciate your home.

Here's a summary of how to depreciate your home broken down into five steps.

First - Determine the portion of your home's value that you will use to depreciate. You need to use the lower of these two numbers: the purchase price of your home or the fair market value of your home at the time you first started using it in your business.

Let's say you bought your home in 2004 for $250,000 and you started your business in 2011. Look at your property tax assessment for 2011 to estimate the value of your home in 2011. If the value in 2011 was $260,000, we would use the lower $250,000 amount for depreciation.

$250,000

Note: Because of housing market decline in recent years it's possible your home was worth less when your business began than when you purchased it.

Second - Subtract the value of the land from your home value. If you are using the home value at the time you purchased your home, use the land value at that time. We will assume the land value in 2004 was $50,000.

$250,000 - $50,000 = $200,000

Three - Add to your home value any home improvements (remodeling, room additions, outdoor deck, etc.) and land improvements (fence, patio) that were done to your home before you went into business. Let's assume you added a deck in 2006 for $5,000 and remodeled your basement and bathroom for $20,000.

$200,000 + $5,000 + $20,000 = $225,000

Note: This amount will never change as long as you are depreciating your home.

Four - Multiply this adjusted value of your home by your Time-Space Percentage each year. The result is the business portion of your home that you can depreciate.

Let's say your Time-Space Percentage for 2012 was 35%:

$225,000 x 35% = $78,750

Note: If your Time-Space Percentage changes in future years this number will go up or down.

Five - Calculate the amount you can depreciate in the current year. Since 1994 you must depreciate your home over 39 years. In the first year of depreciation you will use a percentage based on the month your business began (see IRS Publication 587 Business Use of Your Home or my annual Family Child Care Tax Workbook for these percentages). After your first year in business, use 2.564%. Since you began your business in 2011, we will use this percentage for 2012.

$78,750 x 2.564% = $2,019

Claim $2,019 as your home depreciation deduction on Form 8829 Expenses for Business Use of Your Home.

As you can see, depreciating your home can represent a substantial tax deduction. If you haven't depreciated your home in past years you can either amend your tax return back three years and claim a refund, or file IRS Form 3115 to recapture unclaimed depreciation further back than three years.

Tom Copeland - www.tomcopelandblog.com

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For more on how to depreciate your home, see my 2012 Family Child Care Tax Workbook and Organizer.

It's Not Too Late to Contribute to Your IRA for 2012

One of the biggest tax breaks available to family child care providers is the Individual Retirement Account (IRA).

When you put money into an IRA for 2012 it will reduce your 2012 taxable income. You won't have to pay tax on it (along with the interest you earned) until you withdraw it after age 59 1/2.

By not having to pay tax on your contributions and interest for many years your money will accumulate much faster than if you invested outside an IRA. For more on the tax benefits of IRAs, see my article.

Note: a ROTH IRA works differently than all other IRAs. You won't get an immediate tax deduction when you make your contributions, but you won't pay any tax on the contributions and the interest earned when you withdraw them.

In general, you will be better off contributing to a Roth IRA than a Traditional IRA. See more.

The deadline for making a contribution to your IRA for 2012 is April 15, 2013. You can both establish and contribute to your 2012 IRA by this date (see exception for a SIMPLE IRA below).

Family child care providers may be eligible to contribute to the following IRAs:

Traditional IRA: If you are single you are eligible to contribute. If you are married and filing jointly and your spouse is not covered by a retirement plan at work, you are eligible to contribute if your family's adjusted gross income (AGI) is less than $183,000 ($188,000 for 2013). If your spouse is covered by a retirement plan at work, you are eligible to contribute if you family's AGI is less than $112,000 ($115,000 for 2013).

Maximum contribution - $5,000 per person ($5,500 for 2013); an extra $1,000 if you are age 50 or older.

Roth IRA: If you are single you are eligible to contribute if your profit is less than $125,000 ($127,000 for 2013). If you are married and filing jointly, you are eligible to contribute if your family's AGI is less than $183,000 ($188,000 for 2012).

Maximum contribution - $5,000 per person ($5,500 for 2013); an extra $1,000 if you are age 50 or older.

SIMPLE IRA: You are eligible to contribute whether you are single or married and regardless of your family's income.

Maximum contribution - $11,500 of your profit ($12,000 for 2013); plus an extra $2,500 if you are age 50 or older.

Note: To contribute to a SIMPLE IRA for 2012 you must have established it by October 1, 2012.

SEP IRA: You are eligible to contribute whether you are single or married and regardless of your family's income.

Maximum contribution - 18.59% of your profit.

Additional Rules

You don't have to contribute the maximum contribution to establish an IRA. You can contribute less than the maximum in subsequent years.

You cannot contribute more than a total of $5,000 ($5,000) each year to both a Traditional IRA and Roth IRA. You could contribute $2,000 to a Roth IRA and $3,000 to a Traditional IRA in one year, but not $4,000 to a Roth IRA and $3,000 to a Traditional IRA.

You can contribute the maximum to either a Roth or Traditional IRA and the maximum to a SIMPLE or SEP IRA. You can't contribute to both a SIMPLE IRA and SEP IRA in the same year.

Although many child care providers contribute to their IRA after the tax year is over, it's always a better idea to contribute early in the tax year to get the maximum interest over time. So, plan to make your 2013 IRA contributions now!

Tom Copeland - www.tomcopelandblog.com

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For more information about IRAs, see my book Family Child Care Money Management & Retirement Guide.

Why Quality Rating & Improvement Systems Are Good For All Family Child Care Providers

Today Paula, a typical parent, is looking for child care for her new baby.  She wants a high quality program that will enable her child to be ready for school. With so many child care programs to choose from, how can she find the best program for her child?

It’s not an easy task. Every child care program she has talked to describes themselves as offering high quality. Who should she believe? How can she distinguish one program from another?

State child care licensing rules set a minimum standard of quality that thousands of child care programs have met. There is an exceptionally high quality national accreditation standard (administered by the National Association for Family Child Care), that only a few programs have met.

Where can Paula go to see objective quality rankings of family child care homes?

Quality Rating and Improvement System (QRIS).

QRIS is a rating system that assesses family child care homes (and child care centers). The primary goal of these programs is to increase the quality of child care. It is also designed to increase parent understanding and demand for higher quality early care and education programs.

There are QRIS programs in more than 22 states. The name and details of the QRIS program varies from state to state. Click here to learn more about the program in your state.

Update: Here's a new link to the Michigan QRIS program.

Why You Should Participate

In my opinion, all family child care providers should participate in the QRIS program in your state because of the many benefits it offers.

1)    QRIS will increasingly become a tool parents will use to identify high quality child care programs and compare one program with another. The higher your rating, the more you can use it to market your program and attract new families. Although many parents are not aware of QRS now, this will change over time.

2)    QRIS does set objective standards for quality child care that all caregivers should aspire to. Some caregivers complain that the rating system does not accurately reflect the true quality of their program. If you are now at full enrollment and your current parents are happy with your program, unfortunately this doesn’t necessarily mean you operate a high quality program. Although QRIS may have flaws in how it measures quality, it’s the only rating system in town and it does reflect best practices in the field.

3)    QRIS will allow homes to compete with child care centers on a more level playing field. A three-star home will be able to say that their quality is equal to a three-star center and of better quality than a two-star center. This will increasingly become a useful tool to use in advertising and promoting your program.

4)    In some states there are financial rewards for achieving each higher level of quality. You can use these funds to help you improve the quality of your program. The items you buy are also tax deductible!

Are there complaints about QRIS? Yes. Some homes don’t like all of the paperwork, training requirements, and low financial rewards. These are legitimate concerns.

But, I recommend that you look at the big picture and see how the QRIS system that ranks homes according to objective standards of quality is good for you and for the field of child care. It will spur more and more homes to increase their quality. It will be used as a benchmark by parents as they choose a caregiver for their child.

If Paula can’t distinguish high quality from low quality in her child care search, she is more likely to choose the cheaper care. When she is choosing from programs that are ranked by quality she will choose the highest quality of care she can afford.

As QRIS programs grow and develop over time it will become easier for Paula to shop with more confidence that she is getting what she pays for. Quality, not price will drive her decision.

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Tom Copeland - www.tomcopelandblog.com