A Parent Provider contract

The Basics of a Parent-Provider Contract

Summarized and condensed by Fernando Olmedo, focalerta@yahoo.es

 

As a family child care provider you are generally free to put whatever you want in your parent contract. There are two exceptions:

Some state child care licensing rules define what should be in your contract, so check with your local child care licensor before finalizing your agreement.

Federal anti-discrimination laws make it illegal for you to discriminate in your contract based on race, color, gender, religion, age, disability or national origin. Your state or local government may add additional categories such as sexual orientation.

Other than these limitations, you can establish whatever rules you want in your contract. All contracts, however, should contain the following four clauses:

1) The names of the parties to the contract (the parent and the parent), as well as the name(s) of the children. Also include contact information for each parent (home and work number, email, etc.).

2) The terms of the contract: the days and hours your program is open and the fees you charge (weekly/monthly rate, holidays, vacations, late fees, holding fees, registration fees, etc.). These are the only rules that can be legally enforced by a court of law. In other words, if you refuse to provide care on a particular day that is covered by your contract, the parent is not legally required to pay for that day.

If the parent refuses to pay for care that is covered by the contract, the provider can go to court to enforce this rule. All your other rules are not legally enforceable. These are defined as policies: illness and emergency policies, activities, meals, naps, toilet learning, discipline, etc. If you or the parent are unhappy because the other person is not abiding by these policies, the solution is to end your agreement, not to take the person to court.

3) The method to terminate the contract. Usually providers require parents to give them at least a two-week written notice before the agreement can be terminated. I recommend that providers should include the language "Provider may terminate the contract at will" in their contract. This allows you to immediately end your agreement if a parent becomes disruptive or the child becomes unmanageable.

4) The signatures of the parent and provider. When both parents are caring for their child, you should get both parents to sign your contract so that it can be enforced against either parent.

Make sure at least these four points are covered in your contract. You can always modify it later. Put your policies in a separate document from the contract.

Should I Have My Parent Contract Notarized?

No.

Some family child care providers get their contract notarized because they believe it will make the contract more legally binding on a parent.

But this is not the case.

A contract is legally binding even if it's not notarized.

A notarized contract is one where a notary guarantees that the person's who signed the contract are who they say they are.

A notary is someone who is licensed to certify that a person's signature is valid. Notaries are commonly used in real estate transactions. Two people who are about to sign a real estate contract would appear before a notary and show their identification. Then they would sign the contract. The notary would attach her seal and her signature to the page where the other signatures appear. Notaries are commonly available in banks.

The only situation where a child care provider might benefit from having a notarized contract is if she is suing the parent for payment under the contract and the parent argues that the signature on the contract is not hers. This seems extremely unlikely.

Your contract can be enforced in court without notarized signatures.

What's the Difference Between a Contract and Policies?

A contract is a legal document between a family child care provider and a parent that spells out your legal obligations to each other. Namely, the days and hours you will deliver child care and the amount the parent is to pay you for your services.

Policies are your rules and procedures telling parents how you will care for their children. Your policies can cover a broad range of topics - curriculum, discipline, transportation, activities, and so on.

You can't take a parent to court for violating your policies, but you can for violating your contract. Therefore, I recommend that you create two separate documents: your contract and your policies. This will give you more flexibility in enforcing them.

How to End Your Agreement with Parents

There is a right way and wrong way to end your agreement with a parent of a child in your care.

The right way is to follow the terms of your contract. If it requires you to give parents a two-week notice, do so. You and the parent can agree to end your agreement earlier than two weeks if you put it in writing and both sign it.

Here are three tips to follow to improve the chances that the ending of your agreement will go smoothly.

"Terminate at will"

While I recommend that you require parents to give you a two-week notice to end your contract, I also recommend that you do not restrict yourself to the same terms. Instead, put in your contract, "Provider may terminate at will." This gives you the flexibility to end your agreement immediately if the parent is threatening you, creating a disturbance for your business, or refusing to pay you for your services.

Refund payments?

You cannot charge parents for days that you refuse to provide care. Let's say you want to immediately terminate your contract with a parent. It's Friday. The parent has paid you for the past week and has paid you in advance for the last two weeks of care. If you tell the parent she can't come back on Monday, you are obligated to refund her the amount she paid you for the last two weeks.

Did you or the parent terminate care?

Sometimes there is miscommunication between a family child care provider and a parent. If you are in a conflict situation with a parent and are considering terminating care, be sure you communicate clearly. Let's say the parent owes you money for care from last month and you are struggling to collect it. Your contract requires the parent to give you a two-week notice while you may terminate "at will."

When you try to discus this payment issue today, the parent is vague about when she can pay you. You then make one or more of the following statements:

"I can't wait any longer for your payment."

"I've had enough. I don't think I can go on like this."

"You must pay me by tomorrow or I'm going to have to end our agreement."

It's possible that the parent will conclude from any of these statements that you have terminated your agreement the day of this discussion. Let's say the parent doesn't show up tomorrow and you don't hear anything more from her. Has she effectively given you a two-week notice because she hasn't returned? Did you terminate her?

If it's not your intent to terminate your contract immediately, it's important to be clear to the parent that you expect her to bring her child to your program the next day ("I'll see you and your child tomorrow.")

If you are terminating immediately, you cannot expect any payment from the parent for care after that day.

What if, in response to any of your comments above, the parent says, "I'm not coming back." If you want to be able to collect payment for the next two weeks, you need to come to an understanding that the parent is giving her two-week notice. Therefore, say to her, "Does this mean you are giving me your two-week notice?" If the parent agrees, then either write up a short note that says this and get the parent to sign it, or send the parent an email indicating that you are accepting her two-week notice.

If a parent is not showing up for care and has not given you an official notice to end your agreement, send the parent a note, asking for clarification. If you are willing to continue to provide care say, "I have not ended our contract. You are welcome to continue to bring your child to my program. If I do not hear back from you within a week, I will assume you have given me your two-week notice and I will then proceed to take legal action to collect what you owe me under our contract."

If you don't want the parent to return, say, "I'm sorry we couldn't agree to continue our agreement. I'm no longer providing care for your child." Then say either, "You owe me $ under our contract," or "I'm refunding you $ for the days you paid for care after the end of our agreement," or "You do not owe me any additional money."

The language you use is important to be clear whether you or the parent is ending your agreement.

Hiring employes: clarifications

Clarifications on hiring employees for child care

Condensed and summarized by Fernando Olmedo

 

Requirements for Hiring an Employee

Federal Rules Obtain an Employer Identification number (EIN).

Fill out Form I-9 to verify that the employee is eligible to work in the U.S.
Have the employee fill out Form W-4 to determine if you must withhold federal income taxes from the employee's pay

Withhold social security and Medicare taxes quarterly (Form 941). If you pay less than $4,000 in wages in a year, you can instead file an annual Form 944.

Pay federal unemployment taxes annually (Form 940).

File annually Forms W-2 and W-3 to report Social Security and Medicare taxes.

If you hire more than one unrelated person, you will have to pay at least federal minimum wage of $7.25 per hour. If your state minimum wage is higher, you must pay your state minimum wage. State law may require you to pay the state minimum wage even when hiring only one person. The minimun wages in Illinois are $8.25/hour.

To obtain these federal forms contact the IRS at: http://www.irs.gov/; or 1-800-829-3676.

State RulesYour may have rules that require you to:
Report new hires
Withhold state income taxes
Pay state unemployment taxes
Purchase workers’ compensation insurance
Check with your state department of labor for further information.

This handout was produced by Resources for Child Caring (www.resourcesforchildcare.org ). For additional family child care business publications, contact Resources for Child Caring’s publishing division, Redleaf Press, at 800-423-8309 or visit www.redleafpress.org.

 Hiring Family Members

Many providers hire their own family members and take advantage of IRS rules that allow them to reduce their taxes.  If you hire your own children under age 18, your children will not have to pay any Social Security taxes. Wages paid to your children to do work for your business are 100% deductible.  If you hire your own children who are over age 18 or if you hire your own spouse, wages paid to them are subject to Social Security taxes and federal income taxes.  So there is no significant tax benefit to hiring children over age 18 or your spouse unless you set up a medical reimbursement plan and claim medical expenses as a business deduction.

Providers who do hire their own family members should be careful about keeping the proper records.  The IRS is initially suspicious of these arrangements because they assume that providers are trying to claim a business deduction without meeting the requirements of an employer hiring an employee.  Providers who are sloppy about their record keeping can get into trouble if they can't show that their child did the work for which they were paid.

Here are the records you should keep if you hire your own children or spouse:

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

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.

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, 2007."  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.

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.

Does Paying Someone Less than $600 a Year Make Them an Independent Contractor?

No!

Unfortunately, many family child care providers and tax professionals make this mistake. They assume that they can treat a person who helps them care for children as an independent contractor because they pay the person less than $600 a year. Wrong.

When you hire someone to help you care for your day care children you have an employee, not an independent contractor.

This is true even if you paid the person $50 in a year! It's true even if you hire your grandchild!

When would you have an independent contractor? If you hired someone to clean your home, mow your lawn, or shovel your driveway -  you have an independent contractor.

If you hire someone who does a music lesson or puppet show for the children, this person is also an independent contractor. This is because the person does not operate under your direction or control.

Note: There are two situations where you might hire someone to help you care for children and the person would be considered an independent contractor.

The first situation is a person who is self-employed in the business of providing substitute care for child care providers.  Such a person should have a business name registered with your state and their own taxpayer identification number. She should work for more than one child care provider each year and use her own contract.

The second situation is when you hire a substitute through an employment agency and you pay the agency rather than the substitute.

There is a big difference between hiring an independent contractor and an employee.

If you had an independent contractor (which you probably don't!) you would only have to give this person (and the IRS) a Form 1099 Misc if you paid them $600 or more in a year. You are not required to file any other forms or pay any payroll taxes. You can deduct what you paid the person as a business expense.

If you have an employee you must withhold and pay Social Security/Medicare taxes, pay federal and state unemployment taxes, perhaps purchase workers' compensation, and file a lot of federal and state tax forms

I can hire a 16 years girl school, fewer than 18, for cleaning my Daycare? What is the most and least that I can pay her? I can put it as a deduction on my taxes? Should I fill out a form as an employee, or just with the pay check is enough?

- Yes you can. If a person is hired to do a job as an independent contractor (as you are about to ChildServ or YWCA), not as an employee, there isn’t maximum or minimum pay, she does her work, as a doctor, a plumber ... - and you pay for it. If you hired her as an employee, the minimum is $8.25 per hour, but there are special laws for those under 18. Of course it is a deduction on your taxes, and if you only work in child care, is deducted the total amount that you have paid as a business expense. It's a good idea to make a contract, but is sufficient for the IRS to paycheck and a 1099-self-employed (the same as you are commanded by Controller Illinois).

To hire an assistant older 18 years, apart to fill the DCFS qualify asks, I must hire her for 40 hours, or I can decide the works hours available, as work goes up or down? Is it better to fill out the forms as an employee or as a contractor? Do I need to hire contract this wizard? If I hire her as a hired person and she doesn’t fill her taxes, can I have problems with the IRS? Should I ask her to complete the Form 1099-MISC to make sure that she reports and I’ll have no problems with the IRS?

- You choose the hours she will work, it haven’t to be 40.
- Make a contract is a good idea.
- When a person works regularly at home, is legally an employee. However, the only way to employ a person is paying a good accountant to take care of the fees deducted paycheck of employee.

 To avoid that expense most providers hire them as "self-employed". It is not legal, and the IRS may require to hire as employees, but so far I do know, there aren’t any provider who has had trouble hiring assistants as "independent contractors", even when the IRS has done an audit for other causes. If you had an employee, you would have to pay half of the social security taxes and medicare of the employee, but if we put her as hired independent, the person employee then has to pay all their social security taxes and medicare to make her own "income tax ". That usually leads to problems. To avoid this, make sure to hire her to make that clear, or find a solution that is fair to both, as reporting only half of you pay her, or pay her half of the social security taxes and medicare.

- The employee don’t fill the Form 1099-MISC, you fill it. You can be crafted in ways that made sold in stationery stores, or you full it and sends electronically to the person who making your rates. He should send it to the worker in January, but if he haven´t done, send it anyway. If the employee does not report, you are not in trouble, she will be in trouble. Your accountant can fill out the form 1099-misc and should not charge you for that, it's too easy.

To hire a person, he must be licensed and legal insurance, or your ITIN number is enough?

- You don´t need a license. It is not legal to hire a person who hasn´t social number or permission to work legally in USA. But they don´t ask you to verify that the number she gave you is good. Write down the number that your put in the form "Permission to review the record" and use it to fill the 1099-MISC. If it isn´t good, at the end of the year you will receive a letter saying that you shouldn´t re-hire that person because he has no work permit. But don´t problem for you.

If in previous years we have kept only canceled checks and receipts with the worker's signature ... Is it okay if an audit?

- It's perfect. You don´t need more, it proof that he worked for you and you paid.him

Each year we receive a 1099-MISC Healcare IL SEIU Benefit Fund, with an amount as "non employee compensation" How report we this amount on our taxes, as income and / or deductions? Because it's not really the amount that we receive as income, and nor the amount that they pay to doctors.

- It is an income then put it as income. The amount you get (6226.08 for 2012) is the insurance that they are giving away. You must declare any gift over $ 5,000. Medical expenses can have them as "itemized deduction" in the form A- the third page of your income tax-. Sometimes the standard deduction is more than the detailed, and then medical expenses would not appear.

The cost of your insurance increases your rates to declare additional income $ 6.226. Your rates increase by about $ 952, but can increase to $ 1,200, and sometimes they are $ 600, and if your income is very low and reach to receive a credit for the income it can increase the returns. The only way to know is to ask your accountant that looks at as change yours rates when you put on and take that amount.

If your husband has a work insurance and this insurance cover you for free, don´t take the safety of the Union. If not, take the safety of the Union, if you had to pay it, you would pay about $ 12,000 per year, get it for $ 1,200, or $ 600, or nothing, is a true gift.

Hiring employees yours childrens

“I’ve heard the term “casual labor” in referring to hiring my children. What does this mean?"
 

- Casual labor is another term for an independent contractor. You do not have an independent contractor when hiring your own children. You must treat your children as employees.

“Is there a minimum age for paying your child?”
 

- Federal law prohibits you from hiring anyone under age 14 who is not a family member. There is no federal child labor law regarding hiring your own children. So, you could pay you eight or nine year old to help you clean up after the children, set the table, etc. However, your state labor law may prohibit you from hiring your own children under age 14. Check with your state department of labor.

“If I paid my 16 year old daughter to help me care for children how much can she earn before she has to pay taxes?”
 

- Children of your own under age 18 who earned less than $5,950 in 2011 do not have to pay Social Security or federal income taxes. And they don't income taxes.

“Where on my tax forms do I put the amounts I paid my own children?”
 

- Schedule C, line 26 Wages.

“Can I only pay my own children for work they do after the daycare children are gone?”
 

- No. You can pay your own children to do work while children are present (cleaning, setting the table, teaching other children, helping you with activities, etc.).

Hiring employees: your husband retired

“My husband will soon be retiring. Should I hire him so we can deduct health insurance premiums?”

-You can hire him and deduct family medical costs, including health insurance premiums by setting up an IRS Section 105 medical reimbursement plan. You don’t have to pay your husband a salary and thus avoid paying any payroll taxes.

Hiring employees: retired

“Do I have to pay Social Security tax on the retired person that mows our lawn during the summer?”

-No. An individual you pay to mow your lawn, clean your home or do gardening is an independent contractor, not your employee. Therefore, you don’t have to withhold or pay Social Security taxes. If you pay individuals $600 or more in a year you must give a copy of IRS Form 1099 to the worker and send a copy to the IRS. If you hire a company to do this work, you do not have to issue Form 1099.

Claiming car expenses

Claiming Car Expenses

Condensed and summarized by Fernando Olmedo, focalerta@yahoo.es

• You can claim a car trip as a business expense if the primary purpose of the trip is business

• You must keep adequate records to prove that you made a business trip

• Receipt
• Mileage log
• Cancelled check
• Debit/credit card statement
• Written record
• Calendar notations
• Photograph

•  Two methods to claim car expenses
• Standard Mileage Method
• Actual Expenses Method

•  Standard Mileage Method
• 51 cents per mile: January - June 2011
• 55.5 cents per mile July - December 2011
• Can also claim parking, tolls, and business percent of car loan interest and personal property tax

•  Actual Expenses Method
• Can claim business percent of all expenses associated with the car, including gas, oil, repairs, insurance, depreciation, car loan interest, etc.
• Business percent is calculated by dividing the number of business miles by the total number of miles
• 2,000 business miles divided by 10,000 total miles = 20%

Other questions: “Can I deduct the car loan payment?”

- No. If you use the actual expenses method you can depreciate your vehicle. This will allow you to deduct over time the cost of the vehicle. You can always deduct the business portion of any car loan interest you pay, whether you use the standard mileage method or the actual expenses method.

“If I didn’t claim mileage in 2011 can I claim these miles in 2012?”

 
- No. The only way to claim these expenses is to amend your 2011 tax return using IRS Form 1040X.

“Can I deduct 100% of the miles I drove to supermarkets if I bought things for the daycare and my family?”
 

- Maybe. You can only deduct trips where the “primary” purpose of the trip was for your business. Primary purpose means more than 50% of the reason you drove was for your business. If you spend more money on business food than personal food, you could count this trip. However, never deduct 100% of trips to grocery stores because the IRS will say you must have some personal trips. Count maybe 60%, 70%+ of your trips to grocery stores, but never 100%.

“If I use the standard mileage rate can I also deduct vehicle insurance that was purchased because of my business?”
 

- No. You can only deduct vehicle insurance if you use the actual expenses method for claiming car expenses.

“I have a leased vehicle, can I use the standard mileage rate?”
- Yes.

“Can I go back and forth between using the standard mileage method and the actual vehicle expenses method?”
 

- If in the first year you use your car for your business you choose the standard mileage method, you can switch over to the actual expenses method in later years. If in the first year you use your car for your business you choose the actual expenses method, you cannot switch over to the standard mileage method in later years.

“Do I need to keep odometer readings when claiming car expenses?”

-No.

Be careful what you say

Be Careful What You Say When Talking About Former Clients

By Tom Copeland, Published with permission.

Parents who enroll in your family child care program have a high expectation of privacy.

They don't want any information shared about their family unless the law requires you to share information, or unless they have given you permission.

Many child care providers have created their own privacy policy to reassure parents that they will keep confidential any information about the families in their care. See my article, "Do You Have  Privacy Policy?"

Your privacy policy should also extend to after the family leaves your program.

It's unprofessional to talk about parents (or their children) after they leave your program. It may also be illegal.

You may be tempted to talk about your past families to complain about the parent's failure to pay you, or about the child's behavioral problems.

If you say anything about a past family, you should be very careful of what you say.

It is against the law (defamation) to say something about a past family that damages their reputation in the community. If you speak it, it's slander. If you write it down, it's libel. If what you say is true, however, you haven't broken the law.

So, if you say to another provider, "Mrs. Jones is a deadbeat and her child acted like he had ADHD," you have committed slander since this certainly damages Mrs. Jones' reputation.

If you say, "Mrs. Jones left owing me $250 and I had to spend extra time managing her child," this is not illegal if you can prove that what you said is true.

As you can see, it can be difficult to avoid saying the wrong thing.

Sometimes providers are tempted to warn other providers about a parent who has left their program. You don't want the next provider to go through what you went through with the parent. Even though your motivation may be good, I don't recommend sharing any information about past families with another provider.

Providers can protect themselves against "bad" parents by asking them for the name of their previous caregiver. If the parent refuses to give you the name, don't provide care.

Regardless of a parent's past actions in not paying their bill, providers can protect themselves by following two rules: Parents must pay at least a week in advance and parents must pay for the last two weeks in advance. By following these two rules, providers won't have to worry about parents leaving owing them money.

Three Key Questions

If a parent does give you the name of their previous caregiver, ask the previous caregiver these three key questions:

* "How long did you provide care?"

* "If you had the chance, would you do it again?"

* "What can you tell me about the parent or child that I should consider before enrolling them?"

As the person asking the questions, you are not in danger of violating any defamation laws. This is because you aren't sharing the information with someone else.

However, if you are the previous provider and are being asked to talk about a past family, you are in trouble if you say something that damages the parent's reputation.

First, you should check with your licensing worker to see if it's a violation of your state's child care licensing law to even acknowledge to another person that you used to provide care for a family. (In Minnesota this is against the law). If so, you would say to the provider, "I can't answer any of your questions unless I have written permission from the parent to talk to you."

If you do have such permission, then you could answer the first two questions briefly by saying, for example, "1 year" and "no."

That may be enough information for the new provider. If you do answer the third question, be very careful to stick to the facts you can prove: "The mother paid me late three times in twelve months." Don't characterize the parent as "irresponsible" or "unstable" or "not trustworthy."

There can be a fine line between saying the right and wrong thing. Keep it simple and don't talk about other families.

Tom Copeland - www.tomcopelandblog.com

Image credit: fruitofspirit-mollye.blogspot.com

For more information about privacy/confidentiality, see my bookFamily Child Care Legal & Insurance Guide.

The IRA and the saver's credit

The IRA and the Saver's Credit: An Unbeatable Tax Benefit!

Condensed text by Fernando Olmedo, focalerta@yahoo.es

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

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.

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

Traditional IRA

Eligibility - You are eligible to contribute to a Traditional IRA if your family's taxable income* is below:

        $69,000 in 2013 or $70,000 in 2014 - Single

        $115,000 in 2013 or $116,000 in 2014 - Married filing jointly where your spouse is covered by an employer-based retirement plan

        $188,000 in 2012 or $191,000  in 2013 - Married filing jointly where your spouse is not covered by an employer-based retirement plan    

    

Contributions are tax deductible. Contributions and interest earned are taxed when withdrawn

Maximum contribution amount

        2013: $5,500 per person + $1,000 if you are age 50 or older

        2014: $5,500 per person + $1,000 if you are age 50 or older

Deadline for 2013 contributions: April 15, 2014.

Roth IRA

Eligibility - You are eligible to contribute to a Roth IRA if your family's taxable income* is below:

        $127,000 in 2013 or $129,000 in 2014 - Single

        $188,000 in 2013 or $191,000 in 2014 - Married filing jointly 

Contributions are not tax deductible. Contributions and interest earned are not taxed when withdrawn

Maximum contribution amount

        2013: $5,500 per person + $1,000 if you are age 50 or older

        2014: $5,500 per person + $1,000 if you are age 50 or older

Deadline for 2013 contributions: April 15, 2014.

SIMPLE IRA

Eligibility - All family child care providers are eligible regardless of their family's income.

Contributions are tax deductible. Contributions and interest earned are taxed when withdrawn

Maximum contribution amount

        2013: $12,000 + $2,500 if you are age 50 or older

        2014: $12,000 + $2,500 if you are age 50 or older

Deadline for 2013 contributions: April 15, 2014. However, you must have first established your SIMPLE before October 1, 2013 to make a 2013 contribution.

Note: For all IRA contributions, you cannot make a contribution in excess of your profit for the year. So, if your profit was $4,000, the maximum you could contribute to an IRA would be $4,000.

* family taxable income is the profit from your business (income - expenses), plus the gross income from your spouse.

The saver’s credit

If you had the chance to put $350 into a savings account and have it immediately turn into $1,000, would you do it?

You have this chance if you are a low-income family child care provider and make a contribution to any Individual Retirement Account (IRA) by April 15, 2012.

This federal rule is called the Saver's Credit. If you are single you are eligible for this credit if your adjusted gross income is less than $28,750 ($29,500 for 2013). If you are married your adjusted gross income must be less than $57,500 ($59,000 for 2013). 

If you are eligible you can claim this credit by making a 2012 contribution to any IRA: 401(k) or 403(b) plan, Traditional IRA, Roth IRA, SIMPLE IRA or SEP IRA. To contribute to a SIMPLE IRA you must have set one up before October 1, 2012. 

The tax credit is worth 10%, 20%, or 50% of your IRA contribution, up to a maximum $2,000 contribution.

Let's look at an example of how this works. 

Jayne Provider is single and has an adjusted gross income of $16,500 in 2012. (Adjusted gross income is your business profit plus any adjustments on the front of Form 1040.) She contributes $1,000 into her 2012 Traditional IRA account in March 2013. She is entitled to a 50% tax credit on her contribution - $500. Also, her contribution is tax deductible and since she is in the 15% tax bracket she will receive an additional $150 tax deduction. In the end, Jayne contributed $1,000 into her IRA and reduced her taxes by $650. Yes, she gets a double tax benefit from her contribution!

If Jayne made a contribution to a Roth IRA she would only get the $500 Saver's Credit since contributions to a Roth IRA are not tax deductible.

To claim your Saver's Credit fill out Form 8880 Credit for Qualified Retirement Savings Contributions and carry the credit forward to Form 1040. 

If you made an IRA contribution in the past three years and were income-eligible for the Saver's Credit you can amend your taxes (IRS Form 1040X) and get a refund.

To set up an IRA contact your local bank, credit union, mutual fund or financial planner.

If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit, depending on your age and income.

Here are six things the IRS wants you to know about the Savers Credit:

1. Income limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:

Single, married filing separately, or qualifying widow(er), with  income up to $28,250

Head of Household with income up to $42,375

Married Filing Jointly, with incomes up to $56,500

2. Eligibility requirements To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.

3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

4. Distributions When figuring this credit, you generally must subtract distributions you received from your retirement plans from the contributions you made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year.

5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.

6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.

For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880. Publications and forms can be downloaded 

Claiming expenses for items bought before your bussiness

How Do You Claim Expenses for Items You Bought Before Your Business Began?

By Tom Copeland, posted with permission

There are two different tax rules to apply to items you bought before your family child care business began.

Therefore, we must separate these expenses into two categories.

Items Purchased Specifically For the Business (Start-Up Expenses)

The first category of expenses are those items you bought specifically for the business. They could be a fire extinguisher, toys, supplies, curriculum, advertising, training fees, playground equipment, and so on.

You can deduct up to $5,000 of these expenses in the year your business begins. Start-up expenses are those that individually cost less than $200 or will last less than one year.

* If your start-up expenses exceed $5,000, you must depreciate any amounts above $5,000 over 15 years.

* If you bought an item that cost more than $200 and will last longer than one year, you must depreciate it over 15 years once your business begins.*

For example, let's say you bought ten $50 toys, $450 curriculum, $1,000 in advertising and $100 in training fees between October and December 2013. Your business began on January 1, 2014. You can deduct all of the toys and the training fees because they cost less than $200. You can deduct all of the curriculum and advertising because they are items that you would normally deduct in one year (because they don't last longer than a year).

If you bought a $1,500 playground equipment set in December 2013, you would start depreciating this over 15 years in 2014.

What if You Haven't Depreciated Your Items?

Many providers fail to claim the depreciation they are entitled to. If you did not claim depreciation for household items you owned before you went into business, you can file IRS Form 3115 and recapture all previously unclaimed depreciation on your current tax return. You can also use this form to recapture depreciation on items you bought after you went into business, but didn't depreciate. There is no limit on how far back you can go to recapture this depreciation. See my article "How to Claim Previously Unclaimed Depreciation."

Items Not Purchased Specifically For the Business

The second category of expenses are those items you bought before your business began that were not purchased specifically for your business. They include everything you owned before your business began, then you started using them for your business.

These expenses include: furniture (beds, tables, chairs, sofa), appliances (washer, dryer, freezer, stove, refrigerator, stove, microwave), rugs, lamps, end tables, pots and pans, silverware, television, computer, bedding, pictures on the wall, lawn mower, snow blower, and so on.

These expenses must be depreciated once your business begins. You will depreciate them based on the lower of two numbers: the original price or its fair market value at the time you started using it in your business. In almost every situation this will be the fair market value.

It doesn't matter if the original purchase price or the fair market value was less than $200, or the items were ones that you would normally not depreciate if you purchased them after your business began. Everything must be depreciated.

You can obtain a substantial tax deduction if you conduct an inventory of virtually everything in your home. See my article "Conduct a Household Inventory to Save Money."

For example, let's say you purchased a clock for $25 before your business began and it was not purchased specifically for your business. You would have to depreciate it once your business began. If you bought the same $25 clock after your business began, you would be able to deduct it in one year because it cost less than $200.

Special Circumstances

If you made a home improvement before your business began, add the cost of the home improvement to your house and depreciate it as part of your home. See my article "How to Depreciate Your Home."

If you made house repairs before your business began and they were done to help you get ready for your business, treat them as Start-Up Expenses. If you made a house repair before your business began that was unrelated to your business, you cannot deduct it.

If you know you are going to have a loss in your first year of your business, you can elect to depreciate over 15 years all of your start-up expenses. See IRS Publication 535 Business Expenses.

* Note: Technically, when I say to depreciate these items, IRS rules say to amortize them. What's the difference? In this case, amortizing means to spread the deduction over 180 months (15 years). It's possible for these months to extend over 15 years. Aren't you glad you know this?

Final Note

I've heard from several family child care providers recently that their tax preparer wouldn't allow them to claim any start-up expenses or depreciate household items they owned before their business began. You may need to insist that you want to claim deductions for both categories of expenses I described above.

If your tax preparer says you can't claim start-up expenses, tell them to read IRS Publication 535 Business Expenses.

If your tax preparer says you can't depreciate household items you owned before your business began, tell them to read the IRS Child Care Provider Audit Techniques Guide.

This Guide says: "For many providers, when they start their business many items which were personal use only are used in the business. They are entitled to depreciate the business use portion of those assets. For assets purchased prior to being placed into service, the basis for depreciation is the lower of the cost or the fair market value at the time the asset is placed in service."

Tom Copeland - www.tomcopelandblog.com

Image credit: childcarecenter.us 

For details on how to depreciate items, see my 2013 Family Child Care Tax Workbook and Organizer.