What To Do When You Earn Over $100,000 But Your Profit is Small
Earning over $100,00 a year as a family child care provider may seem farfetched to some, but it's not as uncommon as you might think.
I review a number of family child care tax returns each year and I always see three or four providers whose gross income exceeds $100,000.
However, in most cases these same providers show a business profit of $20,000 or less.
What is going on?
These providers all have very high business expenses. There are some reasonable explanations for how this can happen:
An expensive house with high property taxes, mortgage interest and utilities
Large one-time expenses for major house repairs, purchase of equipment or some unusual expenses
Hiring Employees
The most common reason for high business expenses, however, is the hiring of employees. In some cases, providers were paying $30,000 - $40,000 in wages, plus payroll taxes. In some cases their employees made more money than the provider!
There are non-financial reasons why it may make sense to pay employees a large percentage of a provider's gross income. Some providers:
Want extra help to increase the quality of their program
Want to care for more children and must hire employees
Have a spouse who makes enough money so they aren't concerned about making a low profit.
But, many providers have not taken a close look at the financial implications of hiring employees.
When taking into account wages (some states have a minimum was of $10 and above), Social Security/Medicare taxes, federal and state unemployment taxes and workers compensation insurance (plus hiring a payroll service to handle all of this), these costs can easily reach over $400 a week.
Another way to look at this is that a provider would need to enroll approximately two additional full time children just to pay the cost of hiring one full time employee. Providers would not be earning any more money unless their employees enable them to care for more than two additional children.
The financial solution to this might be to reduce the number of children to avoid the requirement of hiring an employee.
Reduce Expenses
Providers who earn a lot of money tend to spend more on their business. Some providers don't carefully manage their money and end up over-spending on bank fees, supplies, toys, and a variety of other miscellaneous items. Although some of these expenses are reasonable, I've seen many tax returns where the spending was excessive.
Never make the mistake of thinking that it's okay to spend money on your business because you can claim a tax deduction.
Too often providers don't operate on a budget and set financial goals. Instead of spending money, save for your retirement, a long vacation, an emergency fund or some other financial goal.
Earning a high income is great! Keeping more of it for yourself is even better.
Tomcopelandblog.com
Image credit: http://wealthytools.com/women-investors/
For more information about money management, see my book Family Child Care Money Management & Retirement Guide.
