The 5 Steps of
Family Child Care Recordkeeping
Numbers 1 and 2 below refer to what is known as THE TIME/SPACE THING - Time/Space is VERY important for your taxes. There is a Time/Space calculation/equation that gives you a Percent figure that you will in your taxes to determine what percent of some of your expenses you may claim. The higher the percent figure you come up with, the better! Time simply refers to the time you spend doing child care and space simply refers to how much of your home you use to do that child care in. Numbers 1 and 2 below explain in more detail what you need to keep records of and what you need to give to your accountant. Click HERE for an excellent article regarding time/space.
1. Time - Daycare Hours
You will be required to keep track of all of your daycare hours - both actual and incidental. Your actual hours are all the hours you are actually open and taking care of children in your home. (*note: if you are open from 7 a.m. until 5 p.m. and your children are only there from 8 a.m. until 4 p.m. you may only claim the hours you have children there regardless of your opening and closing hours) Your incidental hours are all of the hours you use for child care purposes IN your home (you can not include time spent grocery shopping for example even if it's for the daycare children) while you are not taking care of children.
There are many, many examples of incidental hours. Here is my list:
Daycare Tax & Record Keeping
Prep/Cleanup Time - you can add a set amount of time to your actual daycare hours for getting ready for the children to arrive and for cleaning up after they leave. The usual amount is 1 hour per day (30 minutes prep and 30 minutes cleanup).
Preschool Curriculum Planning - or daycare party planning
Laundry - time spent washing daycare sheets weekly for example
Interviewing Potential Clients - in person and/or on phone
Creating a daycare newsletter - or flyers or business cards, etc.
Cleaning and/or Decorating your daycare space
Networking online (or in your home or telephone) with other providers
Building or maintaining a daycare website
*Note: You may also include hours that someone else does a daycare-related task for you! If your husband paints your daycare playroom on the weekend and it takes him 4 hours, for example, you can claim his time. However if both of you are painting at the same time you cannot claim 8 hours (4 for each of you). You would divide it up, say 2 hours for him, 2 for you.
You should get the idea. Now you want to add all of your Actual and Incidental Hours together for the entire year and present this figure to your accountant. The more hours you can accrue the better!
2. Space - Square Footage of Home
You will need to determine the total square footage of your entire home including your garage. Then determine the total square footage of the part of your home you use regularly for child care. The more area you use for your child care, the better. You don't actually have to have children in your bedroom or your garage, for example, to count it as space you use for child care. You may count these rooms if you 'regularly' use them for child care. For example, I personally claim 100% of the total sq. feet of my home as being used for child care. I store child care food and child care nap mats in my garage and I am in/out of the garage on a daily basis retrieving these items for the children. Therefore my garage is used regularly for child care. You will have 2 numbers here to give to your accountant. One will be the total square feet of your home and the other is the percent of that space you use for child care. Say your home is 2000 sq feet and you use exactly half of it for daycare. You will give your accountant - 2000 sq feet total area of home and 50% used by daycare.
3. Vehicle Mileage
You will get your odometer reading on January 1 of each year and then again on December 31 of the same year. Those 2 figures you will present to your accountant. This is to show that you put so many miles on your car during that year. For example, if you put 5,000 miles on your car this year you had better not show that you drove 7,000 for daycare purposes. LOL
Now you want to keep track of your mileage in some sort of fashion. You can do this by hand or on your software or even in a spreadsheet format like MSWorks if you are familiar with that. What you will need to do is write down the date, the place you went, then the round trip miles it took you to drive back and forth. Here is a very simple table showing you how to do this:
Keep track of every place you go primarily for daycare purposes and then total up your miles at the end of the year. You can include places that you go for both your family and daycare like if you go grocery shopping for both at the same time. Some other examples are to the bank, to the library, school, training classses, etc. An easy way to do this is to purchase a little stick-on dash tablet to keep in your car and jot yourself a note every time you go someplace. Another way (and how I keep track) is that when I record my expense receipts in my Calendar Keeper, I not only jot down the expense but the mileage I drove to get whatever it was I purchased. I keep a Master List of all the normal places I drive to and I refer to that to get the mileage I need for my records. In creating a Master List like this, mapquest.com works wonders to determine the mileage without having to actually get in your car and drive it! Don't forget to double the mileage as you will count the round-trip mileage, not just one way.
So you will have 3 figures here to give to your accountant:
1. Odometer Reading January 1
2. Odometer Reading December 31
3. Total Daycare Miles traveled during the year
Keep track of all the monies paid to you for the entire year from all of your clients. These include parent payments (you must include late fees and bonuses as income), enrollment fees, government payments for low income families, grants, and food program payments/reimbursements. Keep track of how much money EACH family pays you for the entire year. It is good practice (though not required) to present each family with a W-10 Form each January with that figure on it. You should be able to obtain this form free from the IRS website. Have your parents sign this form and each of you keep a copy. Just as a side note because I have heard this question a lot. You are NOT REQUIRED to supply your parents with a W-10 form! It is actually THEIR responsibility to give this form to you! At that point, you are then required to fill it out. Most providers, however, do provide the form themselves to their clients as a courtesy.
* Note: regardless of when you earned income, you claim it for the year in which you RECEIVED it.
You will give one figure to your accountant, the combined income of all of the above.
Expenses are your most complicated aspect of daycare taxes. I shouldn't say complicated because I think it's pretty simple, it's just that there are soooo many categories of expenses to keep track of. The number 1 rule is SAVE EVERY RECEIPT!! Get some kind of folder or something to keep them in. Now I don't go sitting here and recording every single receipt as I get one, realistically most of us don't have the time for that. When I return from a store, I handwrite the date of the receipt at the top of it and I put a small x next to each item I purchased for daycare in any way. *Note: do not put an x by any food items unless it is food purchased for a daycare party. I then throw that receipt in a folder I keep in a file drawer in my desk. I then attempt once a month or every other month to pull out all of my receipts to record them. I can easily separate them by date as I've already written the date on the top of each one. I will take all of January, for example, and put them in Chronological Order beginning with the first of each month and staple them together. (At the end of the year I have 12 piles of receipts - all neatly stapled together at the top by month. I then put them in a gallon-sized ziplock baggie and store them for however many years - 7 I believe it is but don't quote me on that).
Expenses are broken down into 2 main categories. These are your DIRECT expenses and your INDIRECT expenses.
Direct Expenses - any expense utilized ONLY (100%) for child care. An example would be Advertising - a newspaper ad you placed to advertise for children.
Indirect Expenses - any expense shared between your family and your child care business. Key word here is "shared." An example would be a Toy that your own child plays with in addition to your daycare children. The Time/Space Percentage that we talked about in Numbers 1 & 2 above will be applied to all of your Indirect Expenses.
For some expense categories there is an easier way of trying to apply your Time/Space Percentage to figure out how much of your Toilet Paper your daycare kids used and how much of it your family used. Say, in good faith, you figure your daycare kids use about half of the Toilet Paper you buy. You can just take your receipt and put that little x next to only every OTHER time you purchase Toilet Paper. Claim it this week (as a 100% Direct Expense) but not next week, etc. As long as you are careful and can show in the case of an Audit (that you have purchased Toilet Paper that you didn't claim) you will be fine. This is why it's so important to keep all of your receipts. Say you go to the store and buy 5 dolls and you have your own 3yo daughter at home living with you. The IRS is not going to believe your own daughter never played with any of these dolls! So you could claim 4 dolls but not the 5th one. But keep your receipt showing you did purchase 5! I find this the easier way of doing it, however you can just say all of these type of things are Indirect Expenses and apply your Time/Space Percentage to it.
Now on to the nitty gritty categories. There are many categories that will go on your Schedule C Tax Form. We will discuss these first. It is very important that you know that everyone will have their own variation of categories. What I might put under "supplies" you might put under "household items." It DOESN'T MATTER!! There are sooo many items which could feasibly go under any number of categories. Again, it does not matter. You will not get into trouble for putting an expense in the "wrong" category. What you want to try to do is make it so you don't have an obscenely high expense under one certain category, that might be a red flag triggering an Audit. I have changed my categories over and over and over again over the years trying to get it the perfect way. I will show you 'my' way and let it just be a guide for you. I have tried to match my categories up to what it says on the Schedule C Form as closely as possible. You will have a list of specific categories and then you will have one additional area on the Schedule C where it will say OTHER EXPENSES and here you can just write in the additional categories you've kept track of that were not up above on the form. Here we go with what I've come up with for my own self along with examples of things I might claim for each category:
*NOTE: T/S refers to your Time/Space Percentage - if any of the following are shared usage between your daycare children and family please use T/S
Advertising - ads, album/scrapbook (to show potential clients), business cards, flyers, website domain fees
Insurance - liability, health, homeowners (T/S)
Interest - this is your home mortgage interest (if you own a home)
Legal & Professional Services - tax accountant, court costs
Office Expenses - office supplies, stamps, computer supplies & software, internet/email fees, books & magazines relating to child care, class fees, cell phone (T/S), greeting cards
Rent of Business Property - video rentals, rental carpet cleaning machine
Repair & Maintenance (of Personal Property) - includes all items not permanently attached to your home or land - cleaning services, carpet cleaning, lawn service, appliance/furniture repair, service contracts for appliances
Supplies (children's supplies) - arts & crafts supplies, curriculum costs, bibs, napmats & bedding, children's books & movies, medicine, swing/walker/highchair/playpen/pottychair/stroller, diaper pail/diapers, holiday decorations, wading pool, carseat, video rental, playdoh, dress-up clothes
Taxes & Licenses - costs to become licensed (ie inspections, fingerprinting, medical exams, tb test), payroll taxes for employees
Travel, Meals & Entertainment - overnight business trip to conference - car or rental car expenses, plane, hotel, purchases at conference, 50% of food and entertainment costs, fees to hire a substitute
Food - 2 ways to do this. I use the Standard Meal Allowance and claim all meals and snacks that I serve the children. No need for receipts this way. Keep records - name of child, dates/hours of care, number of meals and snacks served to that child. You will need to tally up how many total breakfasts, lunches, dinners, and snacks you served. Each meal/snack has a specific dollar amount.
Toys - batteries, bikes, games, child's furniture (kitchen set, etc), dolls, game systems, puzzles, wagon
OTHER EXPENSES - for Schedule C
Household Items - aquarium, play rugs, bookcases/shelving, camera/film, child & safety locks, fire extinguisher, first aid kit, fans, lawn & garden tools, mower, light bulbs, smoke detectors, heater, gates, mulch, flowers
Cleaning Supplies - air freshener, baby wipes, band-aids, cleaners, soaps, detergents, tissue, polish, trash bags, paper towels, buckets, steam cleaner, toilet paper, sponges, vacuum cleaner, wastebasket
Activity Expenses - parties, gifts to children, food, decorations, prizes, entertainment, camera, admission fees, lesson fees
Kitchen Supplies - aluminum foil, baking dishes, dish towels, dishes/bowls/cups, small appliances, plastic wrap, pots & pans, silverware, containers, ziplock bags
GIFTS - purchases for the parents! You may claim up to $25 per parent per year. Cards, presents, flowers, etc
Now here are some additional Expense Categories which I believe go on Form 8829:
Form 8829 - House Expenses
Home Repair & Maintenance (T/S) - expenses to maintain your home's present value - driveway/roof/plumbing/window repair, painting, furnace repair/cleaning, service contracts for built-in appliances
Utilities - cable TV, electric, gas, sewer/water, trash
Form 8829 - Depreciation Expenses
Home Improvements (depreciate 39 years) - built-in appliances, ceiling fans, furnace, mailbox, major remodeling, shed, siding, roof
Land Improvements (depreciate 15 years) - fence, new driveway, patio, swing set, pool, NO landscaping. Land Improvements must have a - useful life of their own
Personal Property (depreciate 5 years) - computer equipment
(depreciate 7 years) - furniture, large daycare climbers/swingset, carpet, TV, fridge (nothing built-in)
The only other expense not covered in this section is a list of all your taxes paid during the year - Federal, State, and City taxes. Just give these figures to your accountant.
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