Keeping records of your child care income

How to Track Your 2012 Income Properly

By Tom Copeland. Posted with permission

The first thing the IRS looks for in a family child care audit is unreported income.

The IRS knows that family child care providers tend not to keep good records and often get paid with cash. As a result, they assume that some child care providers don't report all their income.

Here are some steps to follow to insure that you will have the adequate records of your income:

* Report on your tax return all income from parents, the Food Program, subsidy program, and grants.

* Keep records showing the source of all deposits into your checking or savings accounts (both business and personal). Indicate on a deposit slip, check register, software program, or other record where the money came from (husband’s pay check, business deposit, transfer from savings, etc.). The IRS likes to look at bank deposits and compare them to what you reported as income. If you can’t identify where all the money came from for each deposit the IRS will assume the unidentified deposit is business income.

* If you receive cash from parents and don’t deposit all of it in a bank account, make a note on a ledger or your calendar of how much you received and how much you deposited.

* The IRS will initially assume that a child is enrolled in your program for 52 weeks a year at your full time rate. They will look at your contract to identify your rates. For example, if your rate is $150 a week, the IRS will assume you earned $7,800 a year ($150 x 52 weeks = $7,800) to care for one child. You need to keep attendance records showing when a child was not present (sick day, vacation, holiday, etc.) and if the child was part-time for all or part of the year.

* If your rates change in the middle of the year, or you don’t charge the parent your full rate (because of an family layoff or illness), keep records to show that you did not receive your full-time rate for this child.

Here’s an example: You care for a child for 52 weeks and the child is on the Food Program. But, because of a layoff in the child’s family, you decide to charge the family half your regular rate for three months. The IRS will look at your Food Program records and attendance records to see that the child is present for the entire year. They will then assume that you were paid your full rate for the year. You need to show with your parent payment records that the parent paid less for those three months.

* If your contract says you charge for a late pick-up fee, or for overnight care, be sure that if you don’t charge for any of these fees your records show this. In other words, if your attendance records show that the child was picked up at 7pm and your contract says the pick-up time is 6:30, with a $1 a minute late fee, the IRS will assume that you earned an extra $30 each day this happened. If you are not charging parents for these late pick-ups put a note in your attendance records (“No late fee charged”).

* Give parents an end-of-year receipt of the total amount the parent paid you for the year and ask them to sign a copy for you to keep in your files.

Keeping track of your business income throughout the year will pay off when you do your taxes by saving you a lot of time. Having good records of your income will also help you if the IRS decides to audit you.

www.tomcopelandblog.com

Tax tips and record keeping

Seven Record Keeping and Tax Tips for the New Provider

By Tom Copeland. Posted wih permission

Family child care providers are self-employed taxpayers who must report their business income and expenses to the IRS. It is important to become familiar with all of the IRS requirements for filing your taxes. To help you prepare for this, here are seven record keeping and tax tips to help you as you start your new profession. By following these tips you will be better able to organize your records, claim the maximum legal deductions, and reduce your taxes.

1. Receipts

Keep receipts for every business expense. Your goal should be to have receipts for every penny of your expenses. Because most of the costs to clean, maintain and repair your home can be partially deducted as a business expense (light bulbs, toilet paper, garbage bags, snow shovel, etc.), collect receipts whenever you go to the drugstore, hardware store, etc. Record on your calendar when, you go on field trips or travel because of business. A canceled check may not be as acceptable to the IRS as a store receipt.

2. When can expenses be deducted?

You must report all income from caring for children even if you do not meet or have not completed local regulation requirements. You should begin deducting business expenses as soon as you begin caring for your first child, even if you do not meet local regulations. The only expenses you cannot deduct if you do not meet local regulations are expenses connected with your house (utilities, house insurance, property taxes, mortgage interest, house depreciation and house repairs).

3. Food Expenses

Because food costs will probably be your single biggest expense, you should begin keeping careful track of the number of meals you serve each day, including meals that are not reimbursed by the Food Program. Multiply these meal counts by the standard meal allowance rate to claim food expenses without having to keep any food receipts.

4. Monthly Review

Do not wait until the end of the year to collect your receipts and other records. Conduct a monthly review to make sure you have everything in order. Keep your records in one place. Use envelopes to store receipts by category of expense. Make sure receipts are labeled and can be read. If you forgot to get a receipt or if you could not get one (parking meter, garage sale, etc.), make one of your own to remind you of the expense.

5. Estimated Tax

You may have to pay some federal income tax before the end of the year. To find out if you must pay estimated tax, estimate your income and expenses through the end of the year. If you will owe $1,000 or more in taxes, you may have to pay in quarterly installments due April 15, June 15, September 15 and January 15. There are a number of exceptions to this rule. See IRS Publication 505 Tax Withholding and Estimated Tax.

6. Employees

If you hire someone as a substitute or helper in your business, you should treat this person as an employee, which means you must withhold social security and income taxes for the employee and pay employers’ social security taxes throughout the year. Many providers treat helpers as independent contractors and do not withhold taxes, but this practice is wrong. Only someone who is in the business of providing substitute care or is doing a special service for you (cleaning, puppet show, music lesson) could be considered an independent contractor.

7. Household Inventory

Your house and items in your house that are used at all in your business are being worn out at a faster rate than if you were not doing family child care. As a result, you can deduct or depreciate a portion of the cost of these items as business expenses. Conduct a thorough room by room inventory and list every item (furniture, appliances, lawn mower, etc.) in your house. Consult the Redleaf Press Inventory-Keeper for a room-by-room listing of items.

This handout was produced by Think Small (www.thinksmall.org).
For additional family child care business publications, contact Think Small's publishing division, Redleaf Press, at 800-423-8309 or visit www.redleafpress.org.

"Become a member of the National Association for Family Child Care at www.nafcc.org and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."

www.tomcopelandblog.com

How to keep records fo craiglist and Yard sale purchases

How to Keep Records for Craigslist and Yard Sale Purchases

By Tom Copeland. Published with permission.

You're preparing your 2010 taxes when you realize that you don't have receipts for a number of items you bought on Craigslist and at yard sales. Now what?

This is a common concern for family child care providers who often buy such items with cash. But don't give up!

IRS rules say that you must keep adequate records to support the business expenses you claim on your tax return. See IRS Publication 583 Starting a Business and Keeping Records. Ideally, you want a receipt for your purchases, but it's not a requirement.

Here's what you can do when buying items on Craigslist or at yard sales:

* Bring along a receipt book or write down the following information on a piece of paper. It might say: "February 17, 2011 - Used crib - $15 - 1436 Smith Avenue - saw ad on Craigslist." Have the person you bought the item from sign it.

* Save a copy of the Craigslist or yard sale ad you saw in the newspaper or online.

* Take a picture of what you purchased.

If you didn't do any of these things take the following steps for items you bought in 2010. Write out a note describing the date, item purchased, cost, and place of purchase. Estimate the cost if you have to. Take a picture of the items now.

In the future if you forget to get a signed receipt from the person you bought the item from, try to write down a record of the transaction and take a picture as soon as you can afterwards. It's always a good idea to review your records at the end of each month to catch those transactions where you don't have a receipt.

Do you do something different to record your Craigslist and yard sale transactions?

See also my previous post: The Case of the Fading Receipt.

Image credit: landmarkchurchsalisbury.org

For more information, see my book Family Child Care Record Keeping Guide.

Copyright 2011, Tom Copeland, www.tomcopelandblog.com

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