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As a childcare provider, you already know how important it is to provide a nurturing environment for children. But when it comes to taxes, navigating the complex world of deductions and credits can be overwhelming. As a hard-working business owner, creating a financially healthy and sustainable business is your top priority.
In this article, we'll explore some effective and practical tax-saving strategies that you can apply to your childcare business, helping you maximize your deductions and minimize your tax liabilities.
Brightwheel webinar: Stress-Free Tax Prep for Childcare Providers
Understanding the tax landscape for childcare centers
It’s important to thoroughly understand the tax-saving strategies detailed in this guide and leverage tools and expert advice that can help you execute these strategies easily. Tax saving is crucial for childcare centers because it directly impacts the business's financial health by increasing cash flow. Taking advantage of tax deductions and credits frees up resources to re-invest in the company through staff training, advanced educational programs and equipment, marketing, and improved facilities.
The federal tax obligations childcare centers must pay include:
- Employment tax: Depending on the size of your program, you may need to pay salaries to multiple staff members. If you have employees, you must withhold social security tax, federal income tax, and Medicare tax.
- Income tax: It’s charged on individual or business income earned in a year.
- Deductions and depreciations: Business expenses for things like supplies, utilities, insurance, and employee wages can be deducted from your taxable income. If you make large equipment purchases, you may be able to take advantage of depreciation deductions.
The state tax obligations for childcare centers are:
- Income taxes: Childcare centers are subject to state income taxes on earnings, depending on the business structure and state tax laws.
- Employment taxes: Each state has its own income tax withholding from employment tax.
- Sales taxes: Some states demand sales tax on the services provided by childcare centers or on goods purchased for use in the center's operations.
- Property taxes: Real estate taxes on owned facilities or personal property.
- Local taxes: Some authorities impose extra taxes or fees on businesses, which childcare centers may need to adhere to based on location.
Tax-saving strategies for childcare centers
Take the stress out of tax season with these tax-saving strategies to help you keep more money in your business bank account.
Engage in year-end tax planning
Tax planning involves analyzing your business's financial situation to pay the lowest tax possible while complying with legal obligations. It involves organizing your year-end records by gathering all financial records and categorizing expenses by separating personal and business expenses and grouping the various business expenses. With brightwheel billing, you can maintain all your financial records throughout the year in one centralized place and access billing and tax statements in seconds. You can also provide families with a direct link to access their year-end tax statements in brightwheel, saving you valuable time from having to manually pull reports for each family.
Year-end tax planning also involves managing the timing of transactions to lower tax liability and reviewing the previous year’s records so you don’t miss any applicable deductions. Remember to set reminders for tax deadlines so you don’t pay penalties.
Monitor cash flow and budgeting
Monitoring your business cash inflow and outflow will help you forecast changes in expenses and income so you can proactively plan to meet your tax obligations and avoid penalties. Use a cash flow statement and review it regularly to accommodate changing factors like costs and market conditions. Access reports and billing data at any time with brightwheel billing and see balances, deposits, transactions, revenue, and more.
Budgeting helps you identify and maximize deductible expenses and strategically manage when you receive income, helping you understand where your money is going and how to improve efficiency. Using brightwheel reports, administrators can transfer billing data to Quickbooks Online, enabling you to complete your accounting processes more efficiently.
Review your business structure
The business structure of your childcare business will affect how you’re taxed, so choose the right one with favorable tax conditions. Below we discuss common business structures and how they’re taxed.
Sole proprietorship
A sole proprietorship is operated by one individual responsible for filing and paying business taxes on their individual returns. As a sole owner, your business and personal assets and liabilities aren’t separate, meaning you’re liable for business debts and obligations and can be sued for business actions. Sole proprietors must pay taxes at the end of each quarter and primarily use Schedule C (Form 1040).
Partnership
A partnership is owned and operated by two or more partners who contribute skills, finances, property, and share in the business’s profits and losses. The partnership isn’t taxed, but the partners make an annual information return reporting their own profits and losses from the business on their personal tax returns using a Schedule K-1 (Form 1065).
“Limited partnerships (LP) have only one general partner with unlimited liability, and all other partners have limited liability. In contrast, a limited liability partnership (LLP) protects each partner from debts against the partnership; they won’t be responsible for the actions of other partners.” - childcaredaily.org
Limited liability company (LLC)
An LLC protects you from personal liability in most instances and allows you to take advantage of the benefits of both a corporation and partnership business structure. Profits and losses can get passed through to your personal income without facing corporate taxes however, members of an LLC are considered self-employed and must pay self-employment taxes.
“The most common business structure for a home daycare is a Limited Liability Company, LLC because it protects personal assets belonging to the owner(s) of an LLC. For example, if the business faces bankruptcy, or a lawsuit, the owner(s) of the LLC are not personally responsible financially or legally.” - childcaredaily.org
Corporation
A corporation is a legal entity owned by shareholders. Unlike a sole proprietorship and partnership, it’s separate from its owners and has the same rights as them. Corporations can own assets, borrow money, enter contracts, and pay taxes. Corporations pay income tax on their profits and file a corporate tax return on Form 1120. Shareholders also report any dividends received from the corporation on their personal tax returns.
“Many daycare LLCs also choose to tax their business as S-Corporation (S-Corp) to minimize the taxes they have to pay on their personal income. This is because S-Corp LLC owners can declare themselves a reasonable salary. The remaining profits go to the company and are taxed separately.” - Start Global
Implement energy-efficient practices
Building owners who increase energy efficiency in certain building systems by at least 25% may be able to claim a tax deduction under Internal Revenue Code (IRC) Section 179D, which expanded under the Inflation Reduction Act.
To qualify for this deduction, you must be the owner of a qualified commercial building in the U.S, and the systems installed must meet the minimum requirements of Reference Standard 90.1 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE).
The equipment must be interior lighting, heating, cooling, ventilation, and hot water systems or the building envelope installed to reduce the total annual energy and power costs for the above systems by 25% or more. Other energy-efficient initiatives include the Residential Clean Energy Credit and the Commercial Clean Vehicle Credit.
Take advantage of deductions for employee training and education
The money you spend on professional publications and other continuing education materials for staff training and education can be deducted from your business taxes. Not only can this training enhance employees’ skills and, consequently, the quality of childcare services provided by your business, but it may also lower your taxable income.
Utilize Section 125 cafeteria plans
A Section 125 cafeteria plan is a benefit plan sponsored by the employer that allows employees to access certain taxable and nontaxable pre-tax benefits. Employees can choose from at least one taxable benefit, like cash, and one qualified benefit, like a Health Savings Account (HSA). Premiums employers pay for benefits like health insurance are not subject to payroll taxes. When employees pay for these benefits through a cafeteria plan, the employer's payroll tax liability is reduced.
Explore tax advantages of retirement plans
Employers can enjoy tax advantages of sponsoring a 401(k) plan for employees. Employer contributions are deductible to the extent that contributions do not exceed limitations described in section 404 of the Internal Revenue Code. Many job seekers and employees consider a retirement plan a premium benefit since they’re saving for retirement in a structured way with help from their employers. Offering this type of benefit can help attract employees while also reducing your tax liabilities.
Stay informed about changing tax laws
Tax laws and regulations are constantly evolving, so business owners and administrators must stay updated to ensure compliance, avoid overpaying taxes, and identify tax opportunities that may help save money on taxes.
Best tax deductions for childcare centers 2024
Tax deductions reduce the amount of income that is subject to taxation. For example, if you have $10,000 in taxable income and claim a $2,000 tax deduction, you'll only be taxed on $8,000. Deductions can help lower your taxable income, reducing the amount of taxes you owe. Take advantage of these tax deductions for your childcare business:
- Operating expenses
- Supplies and equipment
- Depreciation of assets
- Meals and snacks for children
- Bank fees and interest
- Advertising expenses
- In-home childcare business
- Insurance
- Membership dues
- Continuing education fees
Operating expenses
Employee wages, salaries, benefits, paid vacation, and insurance expenses qualify for tax deductions. Unfortunately, your salary as a business owner doesn’t count. A payroll software like brightwheel payroll can automate your federal, local, and state payroll taxes, saving you valuable time and maintaining all your payroll records in the same platform you use for admissions and billing.
Other operating expenses like maintenance of your facility and company car, including repairs, oil changes, and gas, are also examples of tax deductible expenses.
Supplies and equipment
You’ll need specialized supplies and equipment to run your childcare business. Examples include toys, games, educational materials, arts and crafts supplies, furniture, and classroom equipment. Your supply and equipment expenses are tax-deductible if you keep detailed records and secure your receipts.
Depreciation of assets
Asset depreciation allows you to recover the cost of specific items over their lifetime. The items must be necessary for your business. Under Section 179 of the U.S Internal Revenue Code, depreciation is allowable for physical property used for your business more than 50% of the time. Examples of allowable property are office equipment, furniture, vehicles, and most other assets that are not buildings or improvements to your building (including a home used for business).
Meals and snacks for children
The food and beverages provided for the children in your care are tax-deductible. You can only deduct employee meals (partially or fully) under certain conditions as stipulated by the IRS. Remember to keep records of grocery receipts, children’s attendance, and meal quantities served to calculate meal expenses accurately. With a reliable tool like brightwheel, you’ll have access to detailed meal reports that allow you to pull information on date, time, food or meal type, amount, and student name.
Bank fees and interest
Bank fees on your business account may seem small monthly, but they can add up over several months. The good news is they’re tax deductible. Also, if you took out a business loan to start your childcare center, the interest on the loan is tax deductible, too.
Advertising expenses
Whether you promote your business in print, online, through an agency, or local radio/TV, your advertising expenses can be deducted from your taxes. This tax deduction allows you to budget for more extensive marketing campaigns to grow your business further.
In-home childcare business
If you operate a licensed childcare business out of your home, some expenses may be partially deductible, like your rent or mortgage payment, property taxes, maintenance, mortgage interest, insurance, and phone line (exclusive to your business). The amount deductible on the home space will depend on whether the area is used exclusively for the childcare business.
You must regularly use your home space for daycare activities to qualify for this tax deduction. For example, if one of your rooms is used daily as a playroom for the children enrolled in your daycare, you can apply for a deduction. However, if it’s used only occasionally for the business, you’re not eligible.
Insurance
As part of operating a daycare business, you’ll need to purchase general liability insurance and other types of business insurance to help protect your business. Typically, business insurance is tax deductible since the IRS generally views these types of expenses as the cost of doing business. If you have employees and offer health insurance, payments made to group health insurance premiums are also tax deductible. Remember to maintain accurate records of all the payments you make towards your policies as you’ll need these receipts when you file your taxes.
Membership dues
Are you a member of any industry-specific professional association or organization like the National Child Care Association (NCCA) or the National Association for the Education of Young Children (NAEYC)? Your membership fees and professional fees for related certifications are tax deductible, so keep your receipts.
Continuing education fees
The early education industry is continuously evolving, and educators must stay informed through courses, workshops, and conferences. Expenses towards continuing education, like books and transportation to and from your facility, are tax-deductible. The education must be directly relevant to the business.
2024 tax credits available to childcare centers
Tax credits directly reduce the amount of tax you owe. It's like getting a dollar-for-dollar reduction in your tax bill. For example, if you have a $5,000 tax bill and qualify for a $2,000 tax credit, your tax liability will be reduced to $3,000. Tax credits are typically more valuable than deductions because they offer a direct reduction in the amount of tax owed. Consider the below tax credits that can help offset the costs associated with providing high-quality child care:
Work Opportunity Tax Credit (WOTC)
The WOTC is a business tax credit provided under Section 51 of the Internal Revenue Code and jointly implemented by the U.S. Department of Labor (DOL) and the U.S. Department of the Treasury through the Internal Revenue Service (IRS). Childcare centers can claim a WOTC if they hire American individuals who are certified members of specific targeted groups that have consistently faced barriers to employment. These targeted groups include:
- Qualified veteran
- Qualified ex-felon
- Qualified IV-A recipients
- Designated community resident
- Summer youth employee
- Vocational rehabilitation referral
- Supplemental Security Income (SSI) recipient
- Recipient of Supplemental Nutrition Assistance Program (SNAP or food stamps) benefits
- Qualified long-term unemployment recipient
- Long-term family assistance recipient
To claim WOTC, the childcare center and job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for Work Opportunity Credit) and ETA Form 9061. The business must submit the forms to the state workforce agency within 28 calendar days from the employee’s start date. If your new employee is eligible for a WOTC target group, your state workforce agency will send you a certification (ETA 9063), and you can claim the credit after their first year of employment. Check the IRS website for more information about claiming WOTC.
Small Business Health Care Tax Credit
Your childcare center can benefit from the Small Business Health Care Tax Credit when you pay 50% of your full-time employees’ premium insurance cost. To qualify for the credit, the business must have fewer than 25 full-time employees, spend less than $50,000 in annual average wages, and offer Small Business Health Options Program (SHOP) coverage to all full-time employees. A part-time employee counts as a fraction of a full-time equivalent employee (for credit purposes, two half-time employees equal one full-time employee). This credit only applies to employee premiums and not dependents’ premiums.
Save money for your business
Tax saving strategies play a crucial role in the financial success of your childcare business. By implementing effective strategies like maximizing deductions, exploring tax credits, utilizing specialized software, and seeking professional advice, childcare providers can significantly reduce their tax liabilities and allocate resources more effectively.
Remember, every dollar saved in taxes can be reinvested in providing high-quality care for children and improving your business. So take the time to understand the specific tax benefits available to you, keep meticulous records, and stay updated with changes in tax laws and regulations. With a proactive approach to tax planning, you can optimize your tax savings and thrive in the competitive world of childcare.
This article is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual's legal, tax, and financial situation differs, specific advice should be tailored to the particular circumstances. For this reason, you are advised to consult with your own attorney, CPA, and/or other advisors regarding your specific situation.
