Update: IRS has announced new relaxed rules.
Probably the biggest mistake family child care providers make is not following tax rules when hiring someone to help them in their business.
As I have written elsewhere (here and here), child care providers must treat such assistants as their employees, not as independent contractors. This means that if you hire someone to watch your daycare children, you must withhold and pay Social Security taxes, regardless of how little you pay the person!
In some states you will also owe state unemployment taxes and must purchase workers compensation insurance. If you hire someone on a regular basis, you will have to pay federal unemployment taxes as well.
Yet, some tax preparers advise child care providers to treat assistants as “independent contractors” and file Form 1099 Miscellaneous Income. Others say you don’t have to treat assistants as employees if you pay them less than $600 in a year.
Don’t listen to this bad advice! If you are audited by the IRS, they will not accept your claim that your assistant is an independent contractor. They will force you to pay back payroll taxes, interest, and penalties. This can add up to a lot of money.
Now for the good news!