Daycare Tax Tips

Child Care Workers are Almost Always Employees

Independent contractors are few

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Persons you pay to come into your home and work in your family child care business are almost always your employees. It doesn't matter how few hours they work.

Day care assistants are employees whether you hire them for one day, one week or an entire year. Full time, part time, it doesn't matter. Independent contractor situations are rare.

Many business owners miscategorize employees due to these common misconceptions.

According to the Internal Revenue Service, the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Can you even imagine hiring a home child care helper and not controlling what they do and how they do it?

Even if it's late in the year, it's not too late to get caught up on the proper employer paperwork. You have until the end of January (or possibly February) to provide your employees with a Form W-2.

If you are still tempted to treat your child care assistant as an independent contractor, find out what a nightmare this created for a child care provider in New York and check out Tom Copeland's article on employees vs. independent contractors, as well as reading the rest of this article. . .

Three reasons to treat your child care assistants as official employees:

Reason #1 - Preparing 1099s for workers has been known to trigger IRS audits. Many child care providers prepare a Form 1099-MISC for their assistants at the end of the year, even though the Internal Revenue Service knows that your independent contractor situations are limited. Still, preparing a 1099 is better than nothing. The IRS recently announced a Voluntary Classification Settlement Program using Form 8952. Employers can get a significant break on the payroll taxes when converting workers from independent contractor to employee treatment under this program. To be eligible, however, you must have consistently filed 1099s.

Reason #2 - It is super easy for a worker to rat you out either inadvertently or on purpose. Commonly, former employees will apply for state unemployment benefits, which leads the authorities straight to your door. Many states, including California, are very aggressive in going after unpaid employment taxes.

Your assistant could also decide to tip off the Internal Revenue Service in order to reduce her tax bill. When she realizes that being treated as a 1099 contractor means paying higher taxes (self-employment tax and income tax), she may decide to attach Form 8919, Uncollected Social Security and Medicare Tax on Wages to her federal income tax return and save some money. At the same time, she will submit a Form SS-8, which lets the IRS know how to contact you.

Reason #3 - LIABILITY is perhaps the most important reason to put your worker on payroll. If your day care assistant sustains even a minor injury on the job, she can make a workers' compensation claim. In California, if you fail to get workers' compensation insurance, you are subject to a fine of up to $10,000, or imprisonment of up to one year, or both. You are also responsible for paying 100% of the worker's medical bills. Accidents are all too common, including falls, bites, cuts, and vehicular mishaps. Don't count on an injured worker to be your friend and keep quiet when they need care.

Besides workers' compensation liability, there are also general business liability concerns. Does your insurance cover damages that arise from the actions of your assistant? Is coverage affected if you fail to treat your childcare assistant as an official employee? What if your worker is accused of child abuse? Check with your insurance agent to find out if coverage extends to employees and/or independent contractors and be aware of any situations that could limit your coverage.

All family child care providers should have specialized business liability insurance. If you don't have a policy specific to daycare, or would like to compare coverage, you may want to contact DC Insurance Services located in Southern California at 800-624-0912.

Bottom Line: Don't be daunted by employment tax rules. It's probably easier to comply and less costly than you think. And it's all deductible as a business expense on your tax return.

Last updated 26 June 2013

Posted on 2008-11-10 22:55:52