Tom Copeland is the nation’s leading expert on the business of family child care. We recently talked with Tom to learn more about how family child care providers should operate with regard to recordkeeping, tax filing, and retirement planning.
Tell us a bit about your background. Why did you decide to focus your career on the family child care industry?
My interests have always been writing and communicating. After becoming a licensed attorney, I began work at a child care resource and referral agency in 1984 in St. Paul, Minnesota helping employers offer more child care support services for their employees. I saw that family child care providers received little reliable information about the business side of their work. IRS agents who spoke to providers often couldn’t speak clearly, and child care providers often did not understand recordkeeping and tax issues adequately. I felt that I could communicate complex business issues in a way that could be understood.
So, I created a new job for myself of helping providers become more successful as a business. I travel the country giving workshops on record keeping/taxes, contracts, marketing, legal/insurance, and money management/retirement. I’ve written ten books on these topics. I conduct monthly webinars and have helped providers who are audited by the IRS. I answer questions (at no cost) via phone and email. My website contains over 1,000 articles on the business side of family child care. I left the child care agency in 2010 to continue my work as a self-employed trainer, writer, and consultant.
If someone said to you, “I don’t need to know anything about the ‘family child care industry,’ since I only watch the neighbor’s kids each day until their parents get home from work,” how would you respond?
There is a growing number of child care providers who are not required to be licensed under their state law. These folks care for one or two children in their home (sometimes their neighbors or relatives). Such providers are entitled to the same business deductions as licensed family child care providers and must follow the same IRS record keeping rules. This means they must report their income and expenses on a business tax form (Schedule C) and pay federal income tax and Social Security/Medicare tax on their profit. There is a great benefit to doing so, because in many cases they will be able to wipe out all of their taxable income. On the other hand, failure to treat what they do as a business will hurt them if they get audited if they have not saved their business receipts.
What factors should determine how much a provider should charge for family child care?
Family child care providers are free to charge whatever they want. They should set their rates with three things in mind:
- What do you want to earn?
- What is the going rate in your community?
- What can parents in your community afford to pay?
Your rates should reflect the quality of care you offer. If you offer high-quality care, your rates should be in the top 20th percentile of rates in your area. Beware of charging the “average rate” in your area. If you are above average in quality your rates should reflect this. In the end, parents will pay more based on their perceived benefits of your program. Your ability to show parents how children will learn is directly related to what parents will pay.
What kind of steps related to insurance, legal protection, and/or business incorporation should a typical family child care services provider take?
All family child care providers are automatically self-employed (sole proprietors) when they start caring for children. The vast majority of providers should stay self-employed. Providers should only consider incorporating if they make more than a $30,000 profit, don’t mind doing more paperwork, plan to be in business for many years, and can keep their business records completely separate from their personal records (which is hard to do!).
Most providers consider incorporating to reduce their personal liability. A better way to achieve this is to purchase a lot of professional business liability insurance ($1 million per occurrence, $2 million aggregate coverage). The issue of incorporation is complicated, and providers should not pursue this option without consulting a tax professional and attorney to understand the consequences of incorporating.
Are there any tax breaks or credits that family child care providers can take advantage of?
There are a number of significant tax benefits available to providers. They can deduct a portion of all house-related expenses (property tax, mortgage interest, house insurance, house repairs, utilities, house depreciation). In addition, they can deduct a portion of their furniture, appliances, household items, kitchen supplies, beds, rugs, televisions, lamps, lawn mower, etc. They can deduct these items even if they purchased them before they went into business! They can join the USDA Food Program and receive about $500 or $1,000 per child per year for serving nutritious food. They can deduct food expenses without food receipts if they use the standard meal allowance method.
What tips do you have for organizing the financial records associated with a family child care business in order to minimize the odds of being flagged for a state or federal audit?
There are three important record keeping rules that all providers should follow. By following these rules, they will make the biggest difference in reducing their taxes and avoiding problems in an audit. They are:
1. Save receipts for all expenses associated with the cleaning, repair, and maintenance of the home. In addition to the items listed above, these costs may include: snow shoveling, service contracts on appliances, paper towels, light bulbs, cable tv, etc.
2. Keep track of all the meals and snacks served to children on a daily basis. They do not have to be nutritious to be deductible. Providers can deduct up to one breakfast, one lunch, one supper, and three snacks per day per child. Using the standard meal allowance method, one snack a day is equal to a $189 deduction for one child for a year.
3. Keep track of all the hours worked in the home. This includes hours children are present (from the moment the first child arrives until the last child leaves) as well as the hours worked on business activities when children are not present. These activities can include record keeping, activity preparation, meal preparation, time on the Internet, parent interviews/phone calls, and so on. Only hours inside the home count; hours spent away from the home shopping or attending child care workshops don’t count. If providers track hours they work when children are not present for two months, they can use the average hours for those months for the rest of the year.
When it comes to saving for retirement, are there any differences in how family child care services providers should approach this as compared to owners of other types of businesses?
All family child care providers should plan ahead for their retirement. Because many providers earn a small profit, their Social Security benefits will likely be lower than if they worked outside of the home. This is particularly true for women (who make up the vast majority of providers) who live longer and will rely more on Social Security in retirement.
To compensate for this, providers should contribute annually to their own IRA to take advantage of its powerful tax benefits. Providers can set up a Traditional IRA, Roth IRA, SIMPLE IRA, or the new MyRA. Although saving for retirement is a low priority for many, it’s essential to try to reduce expenses and save even a small amount each month.
What do you see for the future of the family child care provider industry and how profitable these types of businesses can become?
The number of licensed family child care providers has been in decline for several decades. This is in part because of an increase in unregulated care (friend and family care), the rise of preschool programs, and the stress associated with operating a child care program alone in a home. Someone who is looking to make a lot of money should probably not try to start a family child care business. Some do, but the majority go into the field because they love children and want to make a living for their own family. Many providers, however, do make a reasonable profit in this highly rewarding field. All providers make a lifelong impact on the lives of young children. They enjoy showing their love for children and supporting their own family as well.
Taking care of children is half their job. The other half is taking care of business. Providers who keep good records and communicate the benefits of their program can have a successful career.