Frequently Asked Questions From Our Readers

Business Deductions and Tax Questions

Q: Being a Registered Family Child Care Provider, do I need to pay estimated taxes each quarter or can I pay at the end of each year when I file?

A: The answer depends on how much you owe each year in taxes. According to the IRS, If you expect to owe $1,000 or more, you should pay estimated taxes quarterly. You should send the IRS (over the course of the year) either 90% of the tax you anticipate on your next year’s return or an amount equal to 100% of the tax you owed in the previous year - whichever is smaller. If you do not pay enough in estimated quarterly taxes, you may be subject to an underpayment penalty.

Q: What is depreciation and how does it affect me as a home-based child care provider?

A: Whenever you make a business purchase that you will use for more than one year, the Internal Revenue Service (IRS) requires it to be depreciated. This means that you write off the cost on your business taxes over time (rather than during the year when you purchase it). The disadvantage is that instead of getting a deduction in one year, you get it slowly, over a number of years. Depreciation can apply to many things in your business if they cost more than $2,500 and can last more than one year. To learn more, read our guide: What Is Depreciation?

Q: I saw some information about tax laws that would allow family child care providers to deduct most home improvements in one year, rather than depreciating them over a number of years. I am planning to put an addition on my home so I can expand my child care business. It’s going to cost more than $50,000. Can I deduct that in one year?

A: This is called Bonus Depreciation, which allows you to deduct 100% of certain assets in one year without an upper limit on the total amount you can deduct. To qualify for Bonus Depreciation, the item needs to have a useful life of 20 years or less (so it does not apply to your home) and be used for business 50% or more of the time. An addition to your home would have a useful life of more than 20 years and so would not be eligible for Bonus Depreciation.

This second part – requiring that the item in question be used for business 50% or more of the time – is an important one for family child care providers since an expense, such as a driveway paving, that meets the criteria of having a useful life of fewer than 20 years may not qualify if the provider's Time-Space Percentage is less than 50%. It’s also important to note that the percentage for Bonus Depreciation is changing. For 2022, businesses could deduct 100% of the cost of items eligible for Bonus Depreciation, but in 2023 it will go down to 80% and will decrease by 20% each year until it reaches 0% in 2027.  

Q: A child in my care shattered one of my windows so now I am getting all of my windows replaced. The total cost is $11,000 but I am making monthly payments. How do I deduct this expense?

A: If any of the windows are in an exclusive-use area, you can deduct 100% of the cost. You can ask the window company to provide a separate bill for these windows. If the windows are in a regular-use area, you will need to apply your Time-Space Percentage. Depending on that amount, you will either deduct or depreciate the cost of the windows. And remember, monthly payments are not relevant to your taxes. The entire amount that you finance is applied to your taxes in the year that the repair was made.

Q: Is the money I received from the Child Care Stabilization Grant taxable? If so, is it considered business income or personal income?

A: Yes, it is taxable and is considered business income.

Q: When a child “graduates” from my program, I like to take them out for a celebration meal. Is this expense deductible?

A: If the meal costs less than $25, you can deduct the cost as a gift. The IRS allows you to deduct no more than $25 as the cost of a business gift given to each person during the tax year. If the meal costs more than that, you can deduct 50% of the total cost as a business meal.

Q: Can I deduct the cost of my trash pickup? I use it for my home and my business, but I wouldn’t pay for it if I did not have a child care business in my home.

A: If you use the service for both business and personal use, you must apply your Time-Space Percentage to the total cost. That is the amount that you can deduct.

Family Policy Questions

Q: If a client leaves an unpaid daycare bill with me, can I warn other daycare providers about the person? What if another provider reaches out just to ask if a family ever attended my center, how much am I able to say? Is there a time limit on how long we would have to stay quiet?

A: Whenever communicating about previous families, you should be very cautious. You should first consider your policy regarding the confidentiality of children's records and the previous family and child's right to privacy.  If you don't currently have a policy, then you might consider creating one for your current and future families.  A question I would ask myself is: “Do I have this family's permission to share this information?”  If the answer is no or you’re not sure, then I would err on not sharing information. If you have a policy that outlines how you handle children's information that you've shared with your former family and feel confident in talking with this other provider, then I would share only factual information that I would share directly with the family.  Pretend as if this information was broadcast on a billboard for everyone to see.  What and how you share information not only impacts the former family but could also influence the trust of your current and potential families as well. It’s also important to remember that you could be on the hook for defamation if you say something that later turns out not to be true.

Q: I have parents who are divorced. They split the cost of child care. Mom is asking for a receipt for all payments for the previous year, including those paid by Dad. Do I have to provide this to her?

A: You should only issue payment receipts or end-of-year statements to the person who made the payment. You are not under any obligation to tell one parent or caregiver what the other one has paid.

Employment Questions

Q: I pay my teen to work in daycare. Do I have to pay taxes as I would on any other employee?

According to the IRS, it is legal for parents to pay their dependent children up to $12,950 per year (the 2022 personal deduction) untaxed, but after that limit certain taxes do kick in. According to the IRS:

Payments for the services of a child are subject to income tax withholding regardless of age.

Payments for the services of a child under age 18 are not subject to social security and Medicare taxes.  If the child is 18 years or older, then payments for the services of a child are subject to social security and Medicare taxes.

Payments for the services of a child under age 21 are not subject to Federal Unemployment Tax Act (FUTA) tax.  If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes.

Q: I pay my sister to work in my daycare occasionally. Do I have to issue her a 1099?

A: It’s likely that your sister is an employee and not a contractor. Contractors receive 1099 forms at tax time, while employees receive W-2s.

Employers and contractors are treated very differently under both federal and state law. Contractors are considered independent business people and are responsible for their own employment taxes, leaving the employer with fewer legal and financial obligations. That’s why it can be appealing to think of your sister as a contractor.

However, it’s very likely that someone who helps you care for children in your daycare is an employee. In general, if you as the employer have the right to control the manner and means by which the work is performed, the person in question is an employee, not a contractor. In that case, you are required to withhold income taxes, Social Security, and Medicare from wages paid and you are responsible for paying taxes on those employees. You must issue them a W-2 at tax time.

Q:  I am a daycare owner. If I hire my children, ages 8 and 12, and pay them, will that be considered a deductible expense? Will they have to file taxes for it?

A: Your children will have to file taxes, but the good news is that it is easy, and you can deduct the amount you pay them. To do this, you have to issue them a W-2 with your EIN. Note that you only have to fill in the amount you paid them, you do not have to withhold anything. You then send in the W-2, deduct the wages you paid them on your business tax return and, finally, do a simple, free return for your children. If the total amount you paid them is less than the standard deduction, they won't owe any money.

Insurance Questions

Q. What kind of insurance do I need for my home child care business? Is liability coverage enough?

A: General liability insurance alone is not enough for optimal coverage.  A Business Owner’s Policy, or BOP, covers liability AND property losses whereas commercial general liability only covers liability losses. With BOP insurance, your general liability is covered, so you do not need a separate general liability policy.

What you do need, though, are some additional policies. We’d highly recommend property insurance, worker's compensation coverage, and perhaps an umbrella policy to provide an added layer of protection.  Depending on your activities, you may want to talk to your agent about additional coverage for cybersecurity (data breach), loss of business income, or commercial auto if you are transporting children.

Insurance coverage for home daycares is a unique mix of different policies that are specific to the child care business landscape, so providers should be direct when calling insurance companies looking for coverage that they are seeking to insure their home daycare.

Food Expense Questions

Q: Should I be on the Food Program?

A: The Child and Adult Care Food Program (CACFP) is a federal program that provides reimbursements for nutritious meals and snacks to children who are enrolled for care at participating child care centers, including family homes. The reimbursements that you receive from the Food Program must be reported on your taxes as income, while the money you spend on the food served to children can be deducted as a business expense. In most cases, family care providers will benefit financially from participating in CACFP.

Q: I buy food for my family and my child care at the same time. Can I use my Time-Space Percentage to get the business portion of my food expenses?

It’s always best to separate your business and personal purchases. Going forward, you should keep records and receipts showing which food was purchased for your business so you can deduct those expenses. If you’ve already commingled expenses, it may be best for you to have a method to determine what percentage of the food was a business expense and deduct that amount accordingly. Your Time-Space Percentage is reserved for business use of home expenses and does not apply to food expenses.