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Do you qualify to receive social security benefits?

Do You Qualify to Receive Social Security Benefits?

By Tom Copeland. Published with permission.

Family child care providers work very long hours each year and look forward to the day when they can receive Social Security benefits.

But, before you can receive these benefits you must first qualify to receive them.

You must work and pay Social Security taxes for at least ten years before you will quality to receive Social Security benefits.

You don't have to work these years consecutively and they can be a combination of years working as a family child care provider and as an employee for another business.

To pay Social Security taxes you must earn a profit of at least $400 in a year. If you have a business loss or a profit of less than $400, you won't owe Social Security taxes for that year and the year won't count towards the ten-year goal.

In a survey I did for my book Family Child Care Money Management and Retirement Guide 16% of family child care providers did not have a profit large enough to qualify for the work they did in the previous year.

To see if you have qualified to receive Social Security benefits, go to the Social Security website and look up your record of earnings or call 800-772-1213 . If you are age 60 or older you should be receiving an annual statement that will tell you if you do qualify.

If you do earn more than $400 profit, you should be filing IRS Form Schedule SE Self Employment Tax with your annual tax return. This form will calculate the amount you owe in Social Security taxes. The amount is then transferred onto your IRS Form 1040 and added to the federal income taxes you owe. You do not write a separate check to the Social Security office. Check your own past tax records to see that you properly filed IRS Form Schedule SE.

If your profit is slightly below $400 and you have not yet qualified to receive Social Security benefits, it is a good idea to reduce some expenses to show a higher profit and qualify for that year.

It may seem strange to hear me say not to claim a business deduction! Claiming all allowable business deductions is a message I've been preaching for many years. However, making sure you qualify to receive Social Security benefits is one exception to this rule.

Image credit: money.howstuffworks.com

For more information about Social Security, see my book Family Child Care Money Management and Retirement Guide.

Posted by Tom Copeland at 05:44 PM in Money Management & Retirement | Permalink
www.tomcopelandblog.com

Family Child Care Provider Successfully Claims Exclusive Use Room in IRS Audit

Family Child Care Provider Successfully Claims Exclusive Use Room in IRS Audit

By Tom Copeland. Published with permission.

When family child care provider Bethany Marcoe from Sioux City, Iowa was notified she was being audited, she thought she had done nothing wrong and had nothing to hide.

"I went into my audit with great confidence and came out crushed," she wrote me. The auditor told her she owed about $2,800 in taxes.

Bethany had claimed that she used her toddler room and basement exlcusively for her business on her 2009-2011 tax return. I first wrote about Bethany's case in my article "How to Defend Your Exclusive Use Room." For a discussion of the exclusive use rule, see my article "How to Claim the Exclusive Use Rule."

Family child care providers are the only business that can claim rooms in their home that are used exclusively for their business, as well as rooms that are used regularly.

This uniqueness can create problems when child care providers are audited by the IRS and the auditor does not understand these rules. This is what happened to Bethany.

The auditor said she could never claim an exclusive use room for two reasons. One: once a day care child leaves a room it is no longer used for business purposes. Two: there is no way to prove that the child care provider's family does not use these rooms when day care children are not present. In addition, the auditor claimed that Bethany must report as income reimbursements she received from the Food Program for her own child. See my article on this last point.

I wrote a letter to the auditor on Bethany's behalf and refuted the auditor's statements.

At one point the IRS auditor told Bethany that she couldn't claim exclusive use rooms because of what was written in IRS Publication 587 Business Use of Your Home. There is nothing in that publication that says what the auditor thought it said.

It took my letter and Bethany's insistance before the auditor finally read the instructions to IRS Form 8829 Expenses for Business Use of Your Home. There it explains how to calculate the Time-Space Percentage when there are exclusive use and regular use rooms in the same home.

At last the auditor agreed with Bethany. As a result, her tax bill dropped from $2,800 to $1,105.

Bethany had inadvertently claimed all of her basement as exclusive use space, even though she had a laundry room and bathroom in the basement that were used by her family. Her initial Time-Space Percentage was 74%. The auditor originally would only allow 48%, but in the end accepted a revised 59% based on an exclusive use playroom and part of the basement.

Note: some family child care providers and tax preparers are reluctant to claim a Time-Space Percentage higher that around 40% because of the fear that the IRS won't accept a higher percentage. This case is one of many examples where a provider has succesfully claimed a higher percentage.

Bethany wrote me a letter of thanks, saying, "I don't think I could thank Tom enough for giving me the necessary information and encouragement to fight the IRS. Armed with this information from Tom I was able to show the IRS... I was still in the right... and I won."

If you are being audited about your exclusive use room you may want to use the arguments in my letter to defend yourself. Before you do, please contact me to get the latest information on this tax issue.

I continue to help child care providers who are being audited by the IRS through my work with the National Association for Family Child Care. If you need help, please contact me at tomcopeland@live.com or 651-280-5991 begin_of_the_skype_highlighting FREE 651-280-5991 end_of_the_skype_highlighting .

Image credit: Bethany's exclusive use toddler room

For more information on how to calculate your Time-Space Percentage when you have exclusive and regular use rooms, see my book Family Child Care Record Keeping Guide.

www.tomcopelandblog.com

Tax Consequences of Not Being Licensed

What are the Consequences of Not Being Licensed?

By Tom Copeland. Published with permission.

As a family child care provider you fall into one of three categories:

* You meet your state child care regulations

* You are exempt from your state child care regulations

* You are in violation of your state child care regulations

If you are an exempt provider this means you are operating legally under your state's laws. This would be the case if your state had a certification or registration system that was voluntary and you didn't sign up. Or if your state only licenses providers who care for more than four children and you care for three.

If you are exempt the tax consequences are the same as if you were licensed. You can fill out the same tax forms in the same way. You are entitled to the exact same deductions as a licensed provider. The drawbacks: in most states you won't be eligible to participate on the Food Program, and it will be harder to find business liability insurance. Some insurance companies will only offer coverage if you meet your state regulations. In addition, you may not be eligible for grant or loan programs offered through your Child Care Resource and Referral (CCR&R) agency. Lastly, you won't be able to meet higher quality standards and receive financial rewards through your state's Quality Rating and Information System (QRIS), nor will you be eligible for accreditation or other credential programs that signify a quality child care program.

What if you are in violation of your state's child care regulations? In this case you will lose the ability to deduct house expenses (mortgage, rent, property tax, utilities, house insurance, house repairs, and house depreciation). But you can claim all other deductions (food, toys, supplies, car expenses, etc.). You won't be able to get business liability insurance or be on the Food Program. You won't have access to services from your CCR&R (training, grants, loans, referral listing, and more).

I believe every provider should meet their state's child care regulations. Research indicates that providers who do so offer higher quality care than those who don't. If you are licensed I believe every provider should strive to achieve a higher level of quality by participating in their QRIS program or NAFCC Accreditation or a CDA credential.

Photo credit: fbcmlincolnton.com

For more information about starting your business, see my book Family Child Care Business Planning Guide.

Posted by Tom Copeland at 08:48 AM in Record Keeping & Taxes, Starting Your Business |
www.tomcopelandblog.com

Do I Have to Be Licensed to Deduct My House Expenses?

Do I Have to Be Licensed to Deduct My House Expenses?

By Tom Copeland. Published with permission.

Family child care providers are fortunate to be able to deduct many expenses associated with their homes.

These include property tax, mortgage interest, utilities (gas, electric, water, sewer, garbage), house repairs, house insurance, and home depreciation.

These house expenses can total thousands of dollars and represent a signficant business deduction.

Child care providers can deduct the business portion of these expenses (their Time-Space Percentage) on IRS Form 8829 Expenses For Business Use of Your Home.

Can all child care providers claim these house expenses?

The instructions to Form 8829 state that to qualify to claim house expenses, "... you must have applied for (and not have been rejected), been granted (and still have in effect), or be exempt from having a license certification, registration, or approval as a daycare center or as a family or group daycare home under state law."

Suppose your state law says that you can care for unrelated children from one family without needing a license. If you do care for three children from one family, and no other children, you would be exempt from state licensing rules. Therefore, you can claim Form 8829 house expenses.

In this example, if you were caring for unrelated children from two different unrelated families, you would be in violation of state law and therefore would not be entitled to claim house expenses. But, even if you were operating illegally, you could still deduct all other business expenses: food, toys, supplies, car expenses, depreciation on furniture and appliances, etc.

So, the answer to the question posed in the title of this article is "no."

Sometimes tax preparers don't understand the rules for claiming house expenses. A tax preparer from Florida asked me about this today. Sometimes a tax preparer will ask a child care provider, "Are you licensed?" That's not a helpful question. This is because you can be exempt from licensing and still claim the same expenses as a licensed provider.

If you use a tax preparer and are exempt from licensing rules (or have applied for a license but not yet received it), let him or her know that you are still entitled to claim house expenses on Form 8829.

Note: There are some drawbacks if you are not licensed. See my article, "What are the Consequences of Not Being Licensed?"

Image credit: lindaschildcare.net

For more information on claiming deductions, no matter what your status is, see my book, Family Child Care Record Keeping Guide.

Copyright 2011, Tom Copeland, www.tomcopelandblog.com

Should You File Two Schedule C's When Your Husband Works With You?

Should You File Two Schedule C's When Your Husband Works With You?

By Tom Copeland. Published with permission.

Are there situations where a family child care provider would want her husband to pay Social Security taxes under his name on the profit from her business?

Let's say a family child care provider and her husband work side by side caring for children. The child care provider is self-employed (a sole proprietor) and reports all the profit from the business on her business tax return (Schedule C).

The child care provider will pay Social Security taxes on her profit. As a result, she will receive higher Social Security benefits when she retires.

Because the husband is not paying any Social Security taxes on this profit, his Social Security benefits will be lower when he retires.

Is there a way for the husband to earn higher Social Security benefits in this situation?

Yes.

IRS rules allow a married couple in this situation to split the profit, pay Social Security taxes under both their names, and thus spread the future Social Security benefits between the two of them. This can be done without them filing as a partnership.

To do this, the husband and wife should each file a separate Schedule C. They would split the income and expenses on these two forms and each pay Social Security taxes under their own names. This will not increase the total Social Security taxes they will pay.

The two should split the income and expenses according to the amount of work they perform for the business. A husband who works two hours a week doing the record keeping should not claim 50% of the income and expenses.

Warning

The reason to file two Schedule Cs for the one business is to allow the husband to contribute more to his Social Security account, and later earn higher benefits. However, before taking this action I strongly recommend that you find out the long-term impact on the Social Security benefits for both you and your husband.

Social Security rules are complex. You qualify to receive Social Security benefits by working for at least ten years. If your husband also works, you can both receive Social Security benefits. If your husband dies you can receive some of his benefits. Depending on how much you and your husband have earned over the years, it may be more beneficial to have future earnings credited to your husband.

To find out what will be the impact of crediting the profit from your business to you alone or to split it between you and your husband, use the Social Security Retirement Estimator. Talk to someone at your local Social Security office if you are within five years of you or your spouse retiring. They can answer your questions to help you make the best decision.

Other Considerations

You can only file two separate Schedule Cs if you are husband and wife and filing jointly. Unmarried couples or same sex couples cannot do this. You cannot do this if you are a Limited Liability Company (LLC) or a corporation.

If you do this, parents can still pay you and therefore your husband does not need to obtain his own EIN. You don't have to put your husband's name on your child care license or contract. There doesn't have to be any change in how you operate your program.

If you hire employees, either you or your husband can pay the employment taxes. It will not affect the total amount of taxes your family will pay.

I would recommend you keep records (for at least two months each year) to show how many hours in a month each person is working. This will help you defend how you split the income and expenses if you are audited. If you each worked about the same number of hours, each of you would report 50% of the income and 50% of the expenses on their own Schedule C. It doesn't matter who actually paid for the expenses or if all the income was deposited into a checking account under your name only. If you do have a separate business checking account I would recommend putting both names on it.

You can stop filing two separate Schedule Cs in future years if you want to.

Image credit: childcareresearch.org

For more information about claiming income and expenses, see my Family Child Care Record Keeping Guide.

Posted by Tom Copeland at 10:22 AM in Money Management & Retirement, Record Keeping & Taxes | Permalink
www.tomcopelandblog.com

What To Do When You Disagree with Your Tax Preparer

What To Do When You Disagree with Your Tax Preparer

By Tom Copeland Published with permission.

When a family child care provider hires a tax professional to do her taxes, she wants her taxes to be done correctly. She expects that her tax preparer understands the many unique rules affecting her business.

Sometimes, however, you may question how your tax preparer has filled out your tax forms.

What should you do if you disagree with what your tax preparer tells you?

First, say to your tax preparer, "Show me something in writing from the IRS that supports your position."

If the tax preparer can show you that you are wrong, then accept it. But, if he or she can't back up their position with a written authority, you should not let it go.

Ask the tax preparer to contact the IRS directly to seek a written authority. You could also contact the IRS yourself: 1-800-829-4933 .

You can also contact me for help. Or you can ask your tax preparer to contact me (tomcopeland@live.com). I'm happy to point out what the IRS may have said about your question. I've posted everything the IRS has written about family child care in the "IRS Audits/Documents" section shown at the top of my blog.

Here's an example: Let's say you want to deduct the business portion of car loan interest when you are using the standard mileage rate. Your tax preparer says you can't deduct car loan interest unless you use the actual expenses method of claiming car expenses.

You say, "Show me something in writing that supports your position." Your tax preparer won't be able to. Then you say, "I'm not going to accept what you say without a written authority. Please research this issue and contact the IRS if necessary."

In fact, IRS Publication 463 Travel, Entertainment, Gift, and Car Expenses" page 16 says, "However, if you are self-employed and use your car in your business, you can deduct that part of the interest expenses that represents your business use of the car."

Sometimes the answer won't be so clear cut. Your tax preparer may say you can't deduct your front door welcome mat because it's not an "ordinary and necessary" business expense. This language can be found in IRS Code Section 162(a). Ordinary and necessary means typical, helpful, appropriate or useful for your business. Something doesn't have to be indispensible for it to be ordinary and necessary.

There's nothing in writing about welcome mats. You argue that parents and children use your welcome mat to wipe their feet and therefore it's ordinary and necessary. Your tax preparer disagrees and says that it's a personal expense. If you are at an impass, you must make a decision whether to back down or insist that the welcome mat be deducted.

Sometimes you may disagree with your tax preparer because he or she is being too aggressive in claiming business expenses.

I heard this week from a child care provider whose tax preparer told her she could automatically claim that she worked 2 hours per day doing business activities when day care children were not present in her home. There is nothing in writing to support this position.

In fact, it's dangerous to claim any business hours unless you can back them up with some records to show the actual hours you worked. (The best way to show such business hours is to track them carefully for at least two months each year and use the average for these months for the rest of the year.)

If your disagreement with your tax preparer is over a few minor matters, it may not be worth pursuing. But if the disagreement is over a major issue, such as your Time-Space Percentage, then you may want to insist on seeing something in writing before you agree with your tax preparer's position.

If you can't agree on major issues, it may be time to consider changing tax preparers.

No one, including tax preparers, will always have the right answer. We all make mistakes. I make mistakes. However, you should not accept what a tax preparer tells you unless you are comfortable that he or she is giving you the correct information. Asking for something in writing from the IRS to back up a claim is a reasonable request.

Image credit: aksenate.org

For more information about working with tax preparers, see my 2011 Family Child Care Tax Workbook and Organizer.

Posted by Tom Copeland at 10:01 PM in Record Keeping & Taxes | Permalink
www.tomcopelandblog.com