Family child care providers are often looking for ways to avoid hiring employees in their business.
They want the advantages of having another person working with them, without the expense and paperwork of following federal and state payroll tax rules.
Here’s the solution some providers have adopted:
Two providers work out of one of the provider’s home and purport to be running two separate businesses.
They require half the parents pay one provider and half the parents pay the other provider. Each provider reports the income they receive and deduct expenses they individually pay. The owner of the home deducts her house expenses.
Since each provider in this scenario believes they are an independent contractor, they believe they don’t have to worry about employer payroll taxes.
Will This Work?
I don’t think it does, for a number of reasons.
I don’t believe that having parents pay providers separately, by itself creates an independent contractor relationship.
Other than separate payments, these two providers are probably operating as one business, not two.
* Only one provider, not two, can receive reimbursements from the Food Program.
* State licensing rules probably only allow one provider to be licensed as one business in the home. Although the providers may have their names on the license (co-licensed) this only provides evidence that there is one business, not two.
* Even if the above two issues were resolved, the following would need to be present to make the case that there are two businesses:
* Each provider should have their parents sign their own contract. The contracts should not be identical since each provider sets her own contract and policy terms.
* Each provider should register their business name and advertise separately.
* Each provider should run their business under their own rules. This means they shouldn’t have all the children together at all times doing the same thing.
* Each provider should have their own business checkbook and pay for all their business expenses separately. Food, toys, supplies, etc. should be purchased separately and only used by the children in their care.
* The provider who does not own the home should be paying rent for the use of the home, the kitchen, furniture, appliances, etc. to the provider who does own the home.
Given all of this, I don’t see how it can work for two providers to run two businesses out of one home.
If the IRS audits either provider they are likely to conclude that the two providers are partners or that the owner of the home is the employer of the other provider.
If the IRS treats these providers as partners they must file partnership tax forms and the homeowner will lose the ability to claim some house expenses.
If the IRS treats this as an employer/employee relationship, the homeowner will be penalized for not filing various federal payroll forms and for not paying federal and state unemployment taxes.
In addition, it’s likely that the state will penalize the employer for failing to purchase workers’ compensation insurance. This is potentially the biggest risk to the homeowner.
If the other provider gets injured while working in the home, her health insurance is not likely to cover her. Instead, it is likely to be viewed as a workers’ compensation claim. Since the homeowner provider will not have purchased this insurance, she will probably be forced to pay the entire medical bill and pay severe penalties.
This issue is complicated. I advise any providers who are thinking about trying to operate as two businesses in one home to consult a tax professional and lawyer before proceeding.
In my opinion providers will have an extremely difficult time trying to present themselves as two businesses if they are audited or if a provider who doesn’t own the home is injured.
Tom Copeland – www.tomcopelandblog.com