The Importance of Marking Your Bank Deposits
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Imagine this scenario: The IRS is auditing you and wants copies of your bank statements for May 2012.
The auditor asks, "Where did the $300 deposit you made on May 3rd come from?"
Will you know the answer this question?
If not, the auditor could conclude that this was unreported income from your family child care business and charge you additional taxes and interest.
The IRS is generally suspicious that family child care providers aren't reporting all of their income on their tax returns. In an audit, the IRS will try to determine your income by asking to see copies of your monthly bank statements (business and personal, checking and savings). They will add up all the deposits and compare this to your family's reported income.
If your reported income is less than your bank deposits, the IRS may assume you didn't report all of it.
Protect Yourself
There are some steps you can take to avoid this nightmare.
To protect yourself, you want to be able to show that the money you get for your business (parent fees, subsidy money for low income parents, Food Program, grants) is fully reported on your tax return.
To do this, you should be able to show exactly how much money you received from your business as well as how much money you received from all other sources.
The easiest way to show this is by depositing all money you receive into a bank account.
It's not necessary to have a separate business checking/savings account. The IRS will look at all your business and personal bank accounts in an audit.
Therefore, always make a note on the bank deposit slip showing the source of each deposited amount. For example, it might read, "Husband's paycheck," "Food Program reimbursement," "Daycare from Mrs. White," "Gift from mother," "state subsidy check for Mrs. Rooney," and so on.
The bank keeps copies of your deposit slips and you can get them later, if necessary, when you are audited. Or, you might be able to view them online.
You can also track this information on your check register, but the IRS is likely to want to see actual bank statements to prove that the money was deposited.
Cash
Many child care providers receive cash payments from parents. Some providers will keep some or all of the cash they receive to pay for common weekly expenses. Doing so can make it more difficult to show proof of how much business income you received.
You should be making a note in your records when you are paid in cash ("Mrs. English paid $195 cash on 5/1/2014"). But, instead of keeping some or all of the cash you receive, I would recommend that you deposit all cash in a bank. Later, you can withdraw cash from your account.
The same goes for depositing personal income: Don't reduce your deposit by taking some as cash. Deposit it all and withdraw cash in a separate transaction. Doing so will make it much easier to track down later where your money came from.
For example, if you got a $430 check from your mother, but you show a deposit of $375, you may not remember what this is. It's true that your bank deposit statement will show that you received $55 in cash, but it's extra work to track this down.
Record Keeping
At the end of the year, your records should show exactly how much you received from each parent, the Food Program, the subsidy program, and any grants. You should be able to track this income through your bank accounts (proving that the number on your tax return is correct).
You should also be tracking all other money you receive by labeling where it came from on your bank deposit slip or other record.
There are a number of record keeping systems that can help you track your income.
The KidKare online software program makes it easy to track business income. Your records will be automatically saved online for four years.
Other record keeping systems include: Redleaf Calendar-Keeper, Quicken, Quickbooks, or you can create your own system.
Tom Copeland - www.tomcopelandblog.com
For more information, see my Family Child Care Record Keeping Guide.
