Daycare Tax Tips

Treating your assistants as proper employees

What's involved in setting up payroll retroactive to the beginning of the year?

In January, a family child care provider writes:

>I have been paying my daycare assistants as independent contractors, as that is what I was told to do when I started my home daycare. Now I see that I have been doing it all wrong. I read that it is possible to fix it if I do it soon, so I would like to know what I must do and how much it will all cost.

It is possible to go back to the beginning of the year and catch up on employer paperwork, so that you can give each of your assistants a Form W-2 rather than a Form 1099-MISC. The cost will depend on when they started working for you and how much you've paid them.

We charge $125 per quarter to deal with payroll from prior periods, submitting all of the federal and California tax returns and tax payments for you. We only do this kind of work for businesses that sign up for our FCC Payroll Service going forward. If you had assistants prior to April 1 of last year, there are four quarters to deal with.

No matter what you decide about last year, I urge you to make it a priority to get payroll set up for the current year. Do it before you face unwelcome consequences. This is a no-brainer, in my book. If you start paying your employees properly now, you will avoid facing this issue again next year.

There is an article on my website covering the cost of an employee. It does cost more to handle things correctly, but nothing like trying to catch up with the prior year, in which case there are penalties involved for late-filed payroll tax returns. The tax cost for California employers is initially about 19% of wages, but that goes down to about 14% after your employee hits $7,000 in wages for the year. There are other costs covered in the article, including payroll service and workers' compensation insurance.

As far as last year goes, you will owe employer taxes (in the percentages suggested above), plus penalties for late-filed tax returns and payments. Payroll tax returns are due April 30, June 30, October 31, and January 31. The amount of penalties will depend mainly on the amount of payroll taxes reported on the late-filed tax returns. It will also depend on how late the tax returns are filed and when the required payments are made.

There is another issue when it comes to converting over to employee treatment. Who will pay the taxes that should have been withheld from payments you've already made to assistants? Normally, social security taxes, Medicare taxes, and state disability insurance are deducted from employee paychecks. Assistants who are still working for you may be willing to reimburse you for the amount of those taxes now--possibly through a series of payroll deductions. Otherwise, you will have to cover the employee taxes, as well as the employer taxes, yourself, and this will increase your costs.

To get started converting last year's payments to wages, let me know how much you paid your assistants during each three-month calendar quarter. (This means January-March, April -June, July-September, and October-December.) Then I can estimate the taxes and penalties before proceeding.

Last updated 1 July 2013

Posted on 2011-01-25 07:06:01