Daycare Tax Tips

Child care provider shocked at what she owes

Business profit can generate quite a tax bill

A family child care provider writes:

>I was referred by a friend to a tax preparer. She has a large daycare so I assumed he was knowledgeable about daycare taxes. I spoke with him today and I was quite shocked about what I owe in taxes. I started this business because my husband's income went down significantly with the economy. He only made about $36,000 last year. My income after write offs he claims to be around $30,000. I owe approximately $6,000 between fed and state. I want your opinion. Does this sound appropriate to you?

While I'm waiting for a tax return to print, I want to quickly reply to your message. $6,000 in taxes based on the income you describe does seem appropriate to me.

Since you sound like you are new to self-employment, I can see why the total tax is surprising. With self-employment income there is no tax withholding to cushion you. Also, you are paying both income tax and self-employment tax (social security and Medicare taxes) on your business profit. The SE tax alone on a $30,000 profit would be $4,239 (14.13%).

I encourage you to start consistently making estimated tax payments every quarter. Or you can increase your husband's payroll tax withholding to cover the taxes generated by your business. (Or a little of each.)

One thing you don't want to do is start a vicious cycle of owing every year.

Posted on 2011-04-01 19:39:25