Ask Civitas: May Reader Questions Answered!

You have questions, we have answers! Since taking over Tom Copeland’s blog last year, we’ve heard from a lot of you who have questions about the business of family child care. Here’s a roundup of the latest questions we’ve received from all of you, via the Ask the Experts page.

Can’t watch the video? Here’s a transcript:

Question: I am a family childcare provider and I have two helpers, a mother and daughter. The mother asks that the daughter who is under 18 be paid in cash. What forms do I need to have them fill out, and what percentage of their pay do I need to withhold and send to the IRS?

Answer: A great question and an important one. So first of all, very likely, and it's hard to know without the exact role, but most of the time when we're talking about helpers, they're going to be W-2 employees. So if you're paying them in cash or not, you still need to document them as a W-2 employee. So that means you're going to have to verify eligibility for employment, which is an I-9 form, and also have them fill out a W-2 hence W-2 employees.

You're also going to need on a regular basis, quarterly basis, fill out 941 forms for them, as well as state forms. And likely you're also going to need to register with your state to do those forms, and to pay their taxes and withholding because you are going to have to withhold federal income tax, Social Security tax, Medicare. Additionally, there may be state taxes that you have to withhold, plus you have to pay some of those taxes for them as well.

So typically we recommend use an online system like Gusto or Wave. We don't get anything out of it, these are just systems that we know providers are using, they're easy to use, they're going to do these forms and the withholding for you. And even if you're paying in cash, you should be recording it into a system like that that's going to do the reporting for you.

Question: And so that is okay, the request to pay them in cash?

Answer: As long as you're tracking everything else. There's no legal requirement that you pay somebody by check, but you do need to make sure that you are doing that withholding correctly and the reporting correctly.

Question: As a family childcare provider, how do I get set up as an LLC in pain employee? Would they get a W-2 or a 1099 for tax purposes?

Answer: So an LLC is kind of an odd duck because we sometimes think of it as being a corporation, which it is, but an LLC is technically a construct of the state. So in other words, the state you're in defines what an LLC is. Now the federal government has its own definitions of what a corporation is. So what this federal government says is it says, "We recognize you're an LLC, but you have to tell us under our guidelines how you want to be treated." And by the way, that can change once a year. There's some other rules around it, but that can change over time.

So that means that you could be a single member typically, but what we see within childcare providers is single member LLC, which essentially you'll hear sometimes people say it's a sole proprietor LLC. So you act as a sole proprietor, you do the same forms, but you do have the protection of a corporation or they opt to be an S corporation.

In both those cases if you're going to be paying an employee, again, rare cases is somebody who can be a 1099. That's not your choice. There are guidelines that the federal government has set around who is an employee and who isn't. Very typically what we see in childcare businesses is everyone is a W-2 employee, which means just as we were talking about in the last answer, there are forms you have to fill out, there's withholding you have to do. It doesn't make a difference if you're a single member LLC or an S corp LLC. Either way, the process is the same for hiring a W-2 employee.

See: Should I Incorporate My Child Care Business and When Is Someone a Contractor or an Employee?

Question: In terms of setting up your own LLC, is that something that someone could do on their own or would you recommend that they get help doing that with that whole process?

Answer: Speaking from first person, I set up an LLC years ago, I absolutely regretted doing it myself. It's a very painful process. Part of it is, I'm in the Commonwealth of Massachusetts, one of the most highly regulated markets for any business. So that could have something to do with it. And the process, and that was many years ago, and the processes are getting easier and easier.

However, it is a place where you may not necessarily want to get an attorney, but you could use like LegalZoom, or Rocket Lawyer, or one of those online systems. I have not personally used them, but I've heard great things from people who have about how easy it is to set up, and that gives you some structure to it so you're not guessing along the way.

Question: The next question comes from, actually not from a family care provider, but from a coach who has been working with them. Can you tell me what is the single item deduction limit for family childcare program in 2023? I am working with family care providers who received equipment grants, and want to help them prepare for the tax implications should there be any.

Answer: Technically there's no single item deduction limit per se, and I think what the coach is really asking about is depreciation. So what is the number where you suddenly have to start considering depreciation? And that number is $2,500. So once you have an expense, single expense that's going to be durable so it's going to last more than a year. So if you buy the biggest pallet of toilet paper in the world and it's $3,000, technically that's an expense because yes, $3,000 to toilet paper or paper towels, they're going to last more than a year. But under the federal government's guidelines, that would be less than a year.

But if you buy anything that is going to be more than a year, like a computer, a desk, a kitchen appliance, you have a repair done, those sorts of things, and it's more than $2,500, and I should say the business portion. So when you apply your time and space even though something might be $5,000 if your business portion is $2,000, expense. But if that portion is over $2,500, that's when you're going to want to figure out about using depreciation.

Now again, that doesn't automatically mean it has to be depreciated, it's a little bit of a complicated process. We do have a guide to depreciation that we can share as well on this one. There's a simple flowchart in it that you can just trace your finger down, and answer the questions, and that would let you know how to treat it.

Question: I purchased a home for my daycare business. It appears that the previous owner laid the floors themselves and the tile is at least a half an inch higher than the laminate. Typically for taxes, I would depreciate new flooring over 27 and a half years, but the floors have to be redone due to a safety issue since the children are constantly tripping and stubbing toes due to the poor installation of the flooring. Can I claim this as a repair rather than putting it on my depreciation schedule?

Answer: That's a great question and we're just of course talking about depreciation. As I just mentioned, there are times when even if it's over $2,500, you don't have to depreciate. One of those times is if it is considered a repair. A repair is defined by the IRS as something that's using similar materials and has a similar function. So what does that mean? In the most basic level, what the IRS is saying is it's not going to add value to the facility.

So, for example, if you have like 1970s laminate counters in your kitchen, and you were to change them out, and you used very nice imported marble, likely that's going to increase the value, and so that would not be a repair anymore. But if you did something very, very simple, something very basic that was functional, then you might have an argument that it's a repair because it has the same functionality.

And I should be careful to say it's supposed to be similar materials that may not be the same. So, for example, years ago we had asbestos tile in our basement, and we had to take it up, and replace it with other tile. We use very basic tile, similar functionality, similar materials in that it was a very basic material, but it wasn't, of course, didn't have asbestos in it. So it doesn't have to be the exact same materials where you're infusing asbestos, asbestos into things.

So in terms of this particular one, I would say it does sound, and it's always hard without knowing all the details, it does sound like this would be potentially a repair if you're using similar materials, and it's going to have a similar functionality. If you're starting to upgrade it, unless and let's say all the floors are going to be heated, it might be something different. In that case you might be out of bounds, but do know it's not necessarily about safety of the operation, but it does come back to the functionality within the home.

The other thing to keep in mind is that you do have to apply your time and space as appropriate. So even though again, it might be a safety issue, it's not like you can say the entire area's exclusive use, the whole home if the floors extend through the whole home, but you would- Yeah.

Question: Even if you were not having a family childcare out of your home, so that wouldn't be a safety issue because say your family members are not tripping on it. So even though you're replacing it just because it is a safety issue for the children, that time space still applies, it's not a 100% business expense?

Answer: Correct. Because what the IRS is saying is that you're still going to have individual value and time. And look, I know for whoever asked this question, you're probably sitting there saying, "Well, my kids are older. It's really all about the young kids in my home or I'm an empty nester, it's really about the young kids," but I'm just telling you what tax law says. And tax law would say that because there's personal views that's intermingled there, you have to parse out what is personal and what is business use.

Question: If the food program money is not income, how do you include it in your taxes? I've heard that I shouldn't use the net total. I should put the total of the checks I receive, is that correct? And I don't spend as much on food as I received from the food program, so would that be considered income?

Answer: Let's pull this one apart because there's a number of different really important questions that she's asking. So first of all, funding from the Child and Adult Care Food Program is taxable. So no matter how you're going to do it, you do have to consider it in your taxes. So that's number one. There's two ways that you're allowed to do this. One is that you could use what they call the net method, which is what the provider's describing in her email where you take the total amount that you received, minus the total amount you spent, and then you report the net.

So, for example, if I got $10,000 from the food program and I spent $7,000 on food, then I would report the net of $3,000 in revenue. And yes, it would be taxable, it would be considered income. Conversely, if let's say I had $10,000 that I got in revenue from the program and I spent $12,000, then I would not report the revenue, but I would report $2,000 in expenses, the difference between the two. This gets really weird as you can imagine, because suddenly the IRS does not see the calculations.

So there's a bit of a dichotomy here where the IRS allows it, but they also say to you, "We prefer you not do it this way." And that's what they say in their official audit guide is they don't like this method. So as the individual says in her email, she knows she's not supposed to do that, and I would not recommend that for anyone, but I wanted to explain it in case some of you may be using that method and saying, "What is she talking about? Why should she not be using it?"

So now we go to the alternative, which is that you report the actual revenue and your actual costs. The revenue stays the same, it's that $10,000, it's $10,000. When it comes to the costs as a home base provider only. So if you're a listener who's in a center, sorry, this doesn't apply to you, but if you're a home-based provider only, you do have the option of using the standard meal rate, that tier one meal rates. What we find is typically that equals the amount that you're being paid and in some cases exceeds it. So it tends to be a good deal for you.

So in other words, if you can't always use the actual cost, so in the case of like you got 10,000 and you are reporting 10,000 in income and you have 7,000 expenses, yes, that's going to net you 3,000 in revenue that's taxable. When you use the standard meal rate, you may find if you're getting paid on a tier one basis, it's equal. So don't hesitate. And it can also exceed it because remember you can also use the standard meal rate, by the way, with kids, children who are not in the CACFP. So it does provide you with an opportunity to actually have a net negative. So in other words, now you have more than you took in terms of expenses. So I would strongly recommend look hard at that standard meal rate, it's a great deal.

Question:

We have another food-related question here: If a mom provides pumped breast milk to the educator to feed the child, can an educator claim that as a meal with the IRS using the standard method even though it was provided at no cost to the business?

Answer: This is a great question because it goes to the heart of what you're getting compensated for when it comes to that meal rate. This is one I looked up just to make sure and confirm it because it is such an interesting question, and I was curious how the IRS addresses it. What the IRS says is that they're covering when they cover the meals and snacks through the rate, they're accounting for the costs essentially of materials. So they're accounting for those expenses related to the actual product of the meal, but not the labor costs.

So in other words, if you have $20 of food that goes into a lunch for the kids, the IRS is assuming that is all the costs, not necessarily as you would have let's say with cost of good sold where it might also include some of your labor in it. So long-winded way of saying it just covers the cost of materials and a case where there's no cost of materials, you can't use the rate. So in a case like this where the materials are essentially donated for lack of a better word, or provided by an outside source, you're not paying for those so therefore it's not covered.

Question: So this would also apply if a parent were to bring a snack in, is that correct like a donated snack for a birthday or something?

Answer: That's absolutely correct. So the parent brings in cupcakes because it's someone's birthday. In a case like that, you wouldn't be able to charge the snack that day because the materials have been provided by somebody else.

Question: Here's our last question, and this is a tricky situation for this provider: We had a parent many years ago accuse us of putting her child in punitive timeouts while in our care. Apparently she was struggling with her child's behavior at home and was trying to cope with it by blaming her daughter's preschool. She has recently posted a Yelp review making several outrageously false claims against us.

We can post a response, but it won't diminish how many stars we get as our percentage use decreases from her one-star review. Also, when the review is clearly intentionally false and defamatory in an easily provable way, are there additional steps we can take? In this case, I had already sent this family a cease and desist letter for false statements she had made to other parents, but she has clearly now ignoring that."

Answer: This is a really complicated and distressing case. And I'm sure to the provider who sent it to us, this is one of those things that's probably keeping you up at night quite literally every day. And I wish I had a better answer, but in a case like this, you really need to seek legal counsel locally.

There are some specifics of the case that we don't know from what you've provided, that needs to be provided to an attorney. State law may come into effect if you start talking about defamation, as well as some of the other actions that you may want to take with this. So it's really important in this case that you actually do seek legal counsel.

We will be back next month with more questions, so keep sending them in!