What Tax Form Does a Daycare Provider Need to Provide?
When you earn money as a daycare provider, even if only a small amount, those earnings are fully taxable and must be reported on a tax return each year. The appropriate tax form, however, will depend on whether you’re an employee, self-employed or operate the business under a corporate entity. Also relevant is whether you take advantage of certain deductions available to daycare providers.
When you provide daycare services as an employee, filing your tax forms is relatively straightforward. Your employer will report your annual earnings and the amount of income taxes withheld from your wages on a W-2 form. Once you receive the W-2, you will report the information on one of the 1040 forms. In addition, if you ever use a personal vehicle at your daycare job, you may be eligible to deduct some of your expenses using the IRS standard mileage rate or by reporting actual costs, such as for gas and oil. If you take advantage of this deduction, you’ll also need to prepare Form 2106 or 2106-EZ.
If you work independently as a sole proprietor, meaning you’re self-employed, you’ll need to report your daycare income and expenses on a Schedule C or, if your business deductions don’t exceed $5,000, on the Schedule C-EZ. As a result of filling out either of these tax forms, you’ll also need to file a Schedule SE to calculate the amount of self-employment tax you owe on the net profit reported on Schedule C. Self-employment tax covers the same Social Security and Medicare taxes that employees pay through withholding, except you are responsible for paying the entire amount, though you can deduct approximately half of your self-employment tax bill on your 1040 – to which you must attach Schedules C and SE.
Operating a daycare facility in your home can make you eligible to take a deduction for some of your housing expenses, but it will require preparation of Form 8829, with the final deduction amount calculated on it ultimately reported on Schedule C as a business expense. To qualify, you must regularly use areas of your home for daycare services and be legally authorized under your state’s laws to do so. Form 8829 will walk you through the calculation for determining the percentage of your housing expenses, such as rent and utilities, that are deductible. The calculation is based on the percentage of your home’s square footage used as a daycare facility and the number of hours it’s used for business purposes during the year.
Running your daycare business through a corporation or an entity eligible to make an election to be treated as a C or S corporation, requires a different type of tax reporting. C corporations are treated as separate taxpayers and report income and expenses on Form 1120, while S corporations, which are generally not treated as separate taxpayers, file on Form 1120S and issue Schedule K-1s to each shareholder. As a shareholder of the daycare business, the Schedule K-1 will report your share of business earnings to report on your personal tax return.