Daycare Tax Tips

DayCare Providers: Should you set your business up as an LLC?

Understand the costs and consequences first

Before setting up an LLC, I recommend that you consider your options carefully and read Tom Copeland's article entitled Should You Set Up a Limited Liability Company (LLC)?. You may not get as much liability protection as you expect.

For income tax purposes an LLC will function as either a sole proprietorship (if there in only one member), a partnership, or as a corporation. The single-member LLC adds the least amount of cost and complication to the business, so that is what I encourage for child care providers who really want their business to function as a Limited Liability Company. Most child care providers are sole proprietors and certain things, like home expenses, are geared to be reported on an individual's tax return, rather than on a business entity tax return.

As far as income tax reporting goes, a single-member LLC functions as a sole proprietorship and the provider reports her business income on a Schedule C attached to her individual income tax return. However, record-keeping will be more complicated, since you must keep your business and personal records completely separate. Costs will be higher, too.

In California, you must file a shortened version of Form 568, Limited Liability Return of Income and pay an $800 LLC tax to the state annually. California also has an annual LLC Fee, starting at $900, which most day care providers are unlikely pay. It does not kick in until gross day care income (meaning parent and subsidy income without considering expenses) hits $250,000.

If a family child care business is structured as an LLC with more than one member, things get much more complicated. An LLC with multiple members generally functions as a partnership for tax purposes. This requires an expensive business tax return to be prepared and filed every year. It also makes deducting home-related expenses more complicated.....or impossible, should you elect to function as a corporation for tax purposes.

Spouses looking for the best way to operate a home child care together will find that it is cheapest and simplest to have one spouse act as the owner and hire the other spouse. This arrangement may even make it possible to deduct your entire family's medical costs as a business expense by setting up a medical reimbursement plan as an employee benefit.

Last updated: 27 January 2016

Posted on 2011-09-27 00:02:34