The question seems simple. Don’t all family child care providers want a large profit for running their business?
Over the years I’ve seen a lot of tax returns of family child care providers. I’ve seen a provider with a profit of $10,000 on $30,000 of income. I’ve seen another provider with a profit of $55 on over $75,000 of income.
Between these two providers I hope we all agree that it’s better to be the first provider with the larger profit, even though she made substantially less in income.
Your financial goal should be to make as large a profit as you can, rather than to make as much income as you can.
This concept is confusing to some providers. They work hard to increase their income, but then they spend a lot of money and end up with a relatively small profit. In some cases providers deliberately try to keep their profit low by spending money. In other cases, providers aren’t thinking about their profit, but simply buy items for their business because they can deduct them.
For years I’ve advised providers about what they can deduct as business expenses and urged you to take advantage of the unique tax rules affecting your business that allows you to claim so many business expenses. If you spent the money on something for your business, deduct it!
But, too many providers spend too much money on their business. And some providers do so thinking it’s to their advantage to do so because they can deduct these expenses and reduce their taxes.
I remember helping a provider years ago who was being audited by the IRS. She was a single mother and earned about $20,000 that year. Her profit was less than $2,000. One of the items she bought that year was a $1,000 central vacuum cleaner. Even though she bought the vacuum cleaner because she wanted to save money rather than paying a house cleaner each month, this was a bad financial decision. In her situation she couldn’t afford this purchase (or hire a house cleaner) because she had so little for her family at the end of the year.
Recently I looked at the tax return of another provider who earned over $75,000 but had a profit of less than $100. She was spending too much money on a variety of items. Her helper ended up with more money than she did.
In both cases these providers paid very little in taxes. But that’s not the goal. The goal should be a higher profit, even though that means paying more in taxes. What’s important is not how much taxes you pay, but rather how much money you have after paying taxes! (A higher profit will also mean you will receive higher Social Security benefits when you retire.)
The higher your profit, the more money you will have after taxes. You want money to invest for your retirement, start an emergency fund, pay down credit card debt, take a vacation, and so on. One way to help make this happen is by looking for ways to reduce, not increase, your expenses.
As one provider once said to me, “When I go out shopping for something for my business I ask myself this question: ‘Will it improve the quality of my business, will it attract parents to my program, or will it not matter?'” She said that mostly it won’t matter and this helps prevent her from spending money on items she doesn’t really need.
Words of wisdom.
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/68751915@N05/
For further information, see my book Family Child Care Money Management & Retirement Guide.