About United Way

United Way brings people together to build strong communities where everyone thrives.

As one of the world's largest privately funded charities, we serve 95% of U.S. communities and 37 countries and territories; our humanitarian aid supports 48 million people every year. Through United Way, communities tackle tough challenges and work with private, public, and nonprofit partners to boost education, economic solutions, and health resources.

United Way is the mission of choice for 1.5 million volunteers, 6.8 million donors, and 45,000 corporate partners in more than 1,100 communities worldwide. Together, we are building resilient, equitable communities across the globe. Learn more at UnitedWay.org. Follow us: @UnitedWay and #LiveUnited.

About MyFreeTaxes®

MyFreeTaxes helps people file their federal and state taxes for free while getting the assistance they need. United Way provides MyFreeTaxes in partnership with the IRS’s Volunteer Income Tax Assistance (VITA) program to help filers prepare their tax returns on their own or have their return prepared for them for free.

For millions of Americans, tax refunds and credits are essential to their financial stability and success. These credits maximize filers’ refunds and provide important opportunities for individuals and families to build financial stability. For many households, their tax refund may be the biggest check they receive all year. For entrepreneurs, filing taxes can make or break their financial bottom line.

Since 2009, MyFreeTaxes has helped more than 1.3 million people file their taxes for free while claiming over $1 billion in refunds and saving over $260 million in filing fees.

About Civitas Strategies

Founded in 2009 by Gary Romano, Civitas Strategies is a management consultancy focused on increasing the impact of mission-driven organizations, both for-profits and nonprofits. The pandemic of 2020 uncovered countless crippling vulnerabilities for small businesses. As a result, we shifted our work to focus more intensively on the business basics required for small businesses to survive and thrive. Our work across the country since then includes business coaching, technical assistance, and grant administration support to small business owners which includes sole proprietors and corporations.

Introduction

Small businesses play a critical role in our economy, generating income and wealth that supports the financial needs of entrepreneurs, employees, and their families. However, the costs and stress associated with filing business-related taxes limit the positive financial impacts of self-employment for many entrepreneurs, including home-based child care providers.

United Way created this guide to help more owners of home-based child care businesses easily and accurately file their taxes for free. Designed for both full-time and part-time entrepreneurs, this guide takes you through the steps of getting ready to self-prepare your taxes using online software.

This guide has two parts.

Part I: Getting Ready for Tax Season focuses on what you need to know about taxes and how to prepare for tax season.

Part II: Filing Your Return Online offers step-by-step instructions on how to use MyFreeTaxes to complete your return online.

This guide will help you take each step in your tax-filing journey. The layout is in a simple question-and-answer format based on questions frequently posed by other entrepreneurs. To answer the questions, we drew upon official U.S. Internal Revenue Service guidance (including their audit guide for child care providers).

  • Not including all your income on your taxes — such as leaving out a 1099 you received from the Child Care Resource and Referral agency for subsidized care.

  • Taking off too many expenses or ones that are really high — like a provider who claimed $40,000 in cell phone expenses for themselves each year.

  • Taking a very large loss on your business or having losses year after year — businesses will take a loss from time to time (we’ll review that later in this tool) but you want to avoid having losses that are far more than what you earned. After all, if your business regularly loses more money than it earns the IRS may be curious about why you continue to operate it!

  • Claiming 100% use of your vehicle. Some of you may have a van or car you use for transportation for your business — that’s allowed. However, reporting that the vehicle is only used for work (and never for personal reasons) can draw attention since it is less common.

PRO TIP Keeping good records throughout the year will make tax preparation easier.

How to File Your Taxes for Free

MyFreeTaxes helps people file their federal and state taxes for free while getting the assistance they need. United Way provides MyFreeTaxes in partnership with the IRS’s Volunteer Income Tax Assistance (VITA) program and is designed to help filers prepare their tax returns on their own or have their return prepared for them for free. 

EIN vs. SSN

In the early stages of running a sole proprietorship, most business owners usually use their own social security number as the tax identification number for the business. This is a quick and simple way to get your business up and running without having to do any additional paperwork.

However, you can also get an Employer Identification Number (EIN) from the IRS. This number functions like a social security number for your business. It is an identification number issued by the IRS specifically for your business.

The advantage of an EIN is that it will limit the number of documents with your social security number on it, which can help you to keep your personal identification number safe and prevent it from being misused. Sole proprietors must get an EIN if they wish to hire employees, and if you want to open a business bank account with most banks.

What is Included on My Tax Form?

There are different types of business tax forms. Let’s go over the most common ones.

A sole proprietor or self-employed individual is both the owner and the only employee. Income for a sole proprietorship is reported on a Schedule C as part of your personal 1040 tax return. If you have more than one business activity, you will need more than one Schedule C. For example, a home-based childcare provider who also drove for Uber needs to produce a Schedule C for her childcare business and also a separate one for her Uber driving.

A Limited Liability Company is a business structure that offers protections from some liabilities and has tax flexibility. At the time of creation and typically once a year, the LLC owner can declare how they will be taxed. LLCs with a single owner can use the same process as a sole proprietor, but they can also choose to use an S-Corporation or C-Corporation process or, if there is more than one owner, a partnership (all are described below).

An S-Corporation is a small business type where any profit is “transferred” directly to your personal tax return (so you don’t pay corporate taxes on it). An S-corporation uses a Form 1120S (income tax return for S corporation) and will show the “pass through” income to the owner on a Schedule K-1 (individual owner shares).

A C-Corporation is often called a “regular” corporation. The C-corporation uses Form 1120 (corporation income tax return) and will have profit taxed as a corporation before you can claim it as personal income (and it gets taxed again). Likely few home-based providers will benefit from their business being taxed this way.

A partnership is formed between one or more business owners who share the costs and the profit from the business. Partnerships use a Form 1065 to report their earnings.

Though this guide focuses on Sole Proprietors/Self-Employed Individuals who submit a Schedule C, there are three parts of business tax forms that they all have in common:

  • You first report your revenue (all the money you received from your business);

  • You show all your expenses (the things you paid for to keep your business running); and

  • Finally, you calculate the amount that remains. If it is positive, you made a profit; if negative, then a loss.

How Much Money Did I Make?

The first section of your taxes is all about revenue, that is, how much money you made. Getting this information may be easy if you have an accounting system. If not, no worries, you can use the revenue worksheet below to calculate it.

PRO TIP You must include your CACFP reimbursement as income. However, you can still deduct your food costs as expenses. This will help ensure your CACFP reimbursements do not increase your taxes.

Start by gathering your records. You are likely to have three types of records for revenue:

1099 forms — these are evidence that another business paid you for services, such as a 1099-NEC received for providing services on a consulting contract totaling $1,200. You will also receive a 1099-K if you received more than $600 in business payments from apps like Square, Zelle, or PayPal.

Bank records — showing additional funds you may have received from other sources. Keep in mind, even if you didn’t receive a 1099, you still need to report the income.

Your own documents — such as your books or accounting system that have revenue recorded.

Then fill out the revenue worksheets. Include each 1099 and revenue for each child you serve. Also list other income, such as grants, that may not already be accounted for on a 1099. Include each 1099 and other income you have received. Again, don’t include your W-2 employment wages here.

REVENUE WORKSHEETS

(Click here to access the digital versions of these worksheets that you can download and use.)

How Much Money Did I Spend?

Now that you have your business income, you need to collect your expenses, i.e., what you spent money on for your business in 2022. You will need records of your costs, ideally receipts showing payment for expenses, but in most cases you can also use canceled checks, invoices, or credit card and bank records. It is critical that any proof of an expense show:

  • That you paid the expense.

  • The amount you paid.

  • The date you paid it.

  • A description of the item purchased, or service received.

The Mileage Log included in this guide can be used to track the information above.

PRO TIP Make sure all your revenue records match. That is, the amount on a sale receipt to a customer should be the same amount they paid per your bank records and is the amount you report to the IRS.

With your accumulated expenses you can now fill out the expense worksheet below. The worksheet uses the expense categories for a Schedule C that are most relevant to home-based child care providers, but they can also be used for any corporate or partnership tax return as well.

The full amount of home expenses that are directly related to your business can be included in the expense worksheet. The IRS defines a direct expense as one that is “incurred exclusively for the business and provide no personal benefit.” Some examples of direct expenses in your home are: fixing the bathroom used by the children, getting a new carpet for the play area, and light bulbs for fixtures in a play area. Indirect costs associated with your home, such as homeowner’s insurance or your electric costs will be covered under the section on the business use of your home below.

You should hold onto all proof of payments through tax season and at least four years after. It’s great to have paper copies as well as electronic ones, even if that is just snapping a picture of each with your phone.

EXPENSE WORKSHEET

(Click here to access a digital version of this worksheet that you can download and use.)

Regardless of the method you use, you need a simple log recording the number of miles your drove your car for related to business purposes. The log should include:

  • The date.

  • The distance you traveled.

  • Where you went.

  • The purpose (business or personal) as specifically as possible.

The Mileage Log at the end of this tool can be used to track the information above. An example Mileage Log can be found in the resource section of this guide. There are also apps such a Mile IQ and Everlance which can automatically track your trips and make them easier to log. The costs of these apps can also be deducted under Other Expenses.

If you use the Standard Rate, you take the total miles you drove in the year and multiply it by the IRS rate. In 2022, there are two rates. From January 1, 2022, to June 30, 2022, the rate is 58.5 cents per mile. Due to increased gas prices, the rate increased. From July 1, 2022, to December 31, 2022, the rate is 62.5 cents a mile.

For example, if you logged 150 business miles from January 1 to June 30, 2022, and 340 business miles from July 1 to December 31, 2022, your deduction would be:

How Do I Include Vehicle Costs?

Many home-based child care providers use their own car or van to conduct their business. This could be as simple as the personal car you also use to purchase supplies for your business, or a van you purchased to transport children to and from school as part of your child care business. Vehicle costs can add up, so keeping records of costs and knowing how to deduct them is important.

There are two ways to deduct your vehicle expenses:

  • The Standard Mileage Rate provides a simple cost per mile that is used to calculate your deduction.

  • The Actual Expense method uses all the costs of your car.

Here are the pros and cons of each option:

Space used for your business ÷ total square footage of your home x 100 = percentage of your home that you use for child care

For example: a provider uses 500 square feet of her 1,100 square foot home regularly for care. If she divides 500 by 1,100, she gets .454. By multiplying 0.454 by 100, she calculates that 45.4% of her home is used regularly for care.

Why Care About Your Taxes?

Taxes are an important consideration for any business. Through taxes, we all contribute to our government at the national, state, and local levels. Paying taxes and following IRS regulations is important. It’s also important to take advantage of all the deductions and tax credits for which you are eligible. This will reduce your taxes, maximize your profit, and allow you to continue investing in your business.

Effective tax preparation can also head off the long-term cost of an audit. Though only a relatively few people are audited every year, if you are audited, the cost in time and money can be great.

The best way to avoid an audit is to keep in mind common “red flags,” or issues that often lead to an audit. The most common red flags for home-based child care providers are:


1099-NEC INCOME

1099-NEC Payer Name
Amount









Total (add all of the 1099-NECs)
PARENT PAYMENTS & FEES (INCLUDING CASH)
Parent Total Amount Paid
   
   		    
   
   
   		    
   
   
   		    
   
   
   		    
   
   
   		    
   
   
   		    
   
   
Total (add all of the parent payments)   		    
   
TOTAL REVENUE
Total Payment Amount

Total 1099 Payments 		   
   

Total Parent Payments 		   
   

Total Other Payments 		   
   

Total Revenue (add them all up) 		   
   

CATEGORY
DESCRIPTION
TOTAL EXPENSES
Advertising Costs to promote your business including online and print ad costs, brochures, mailers, and flyers.    
   
Car & Truck Expenses related to use of your vehicle for your business. You will most likely use the total mileage calculation in the Mileage Log resource in this document.    
   
Contract Labor
 This is for any contractors you use (workers you pay using a 1099). If you paid a contractor $600 or more in a year, you will need to send them a 1099 form to document the expense.    
   
Employee Benefit Programs Do you have a company health or accident insurance program? This includes programs associated with your business (not your personal expense) like group-term life insurance, and dependent care assistance programs.    
   
Insurance
(other than health)		 Include your general liability insurance and workers compensation insurance if you have employees. Don't include your health insurance (that will be later in this table) or homeowner’s insurance (that will be in the section on deducting the business use of your home).    
   
Interest Paid
 Includes interest you paid directly related to your business (we’ll talk about mortgage interest later in the section on the business use of your home). Deductible interest can include interest on business credit cards (not personal ones) and business loans such as the Economic Injury Disaster Loan or an SBA 7a loan.    
   
Legal Fees & Professional Services
Should include any fees paid to a lawyer, accountant, or tax preparer as well as membership fees for professional associations like the National Association of Family Care or the National Association for the Education of Young Children. 		   
   


Office Expenses		 All office supplies, postage, cleaning supplies and personal protective equipment, apps and software that cost less than $200 (those that are more than $200 will be under Other Expenses). Also add in larger purchases, like computers, telephones, copiers, and furniture that cost less than $2,500.

If any single purchase of equipment or furniture is more than $2,500 you will need to consult current depreciation rules in the What is Depreciation? resource. In 2022, there are special depreciation rules that will allow businesses to elect to deduct the full cost of these higher-cost equipment. Most online tax software, including those available through MyFreeTaxes, will walk you through using these elections. 		   
   
Pension & Profit Sharing Do you have a company retirement program? If so, include the employer contributions you made for the benefit of your employees to a pension, profit-sharing, or annuity plan (including SEP, SIMPLE, and SARSEP plans).    
   
Repairs & Maintenance
Includes any repairs and maintenance of the space or equipment you use. For example, if you need a plumber to fix the bathroom used only by the children or if you need your work computer fixed. 		   
   
Rent or Lease
(see instructions)
For equipment rent or lease only. Costs for renting your home will be included in the section on deducting the business use of your home.		    
   

Supplies		 Includes items you use with the children (such as art supplies), diapers and wipes, toys, and food for snacks and meals that you serve your children. For meals, you can use the actual expenses or can use a standard meal and snack rate set by the IRS. The standard rate for 2022 in all states other than AK and HI is: breakfast $1.66; lunch $3.04; dinner $3.04; and snack $0.97. For AK, the rates are: breakfast $2.59; lunch $4.87; dinner $4.87; and snack $1.52. For HI, the rates are: breakfast $1.91; lunch $3.55; dinner $3.55; and snack $1.12. Note that this applies to home-based child care only and is equal to the Tier 1 CACFP reimbursement rates.    
   

Taxes & Licenses
Such as a business registration fee or fees for licensure		    
   

Travel & Meal
For you as part of your business, such as going to a conference or an off-site meeting. Food for the children in your care should be in Supplies.
    
   

Wages		 For all of your business’s W-2 employees (not contractors).

Note that paying yourself is not included as wages here. You are allowed to take an owner’s draw or salary from your self-employment. However, paying yourself is not deductible, so you will not report that as an expense on your tax return. The IRS considers all income that you receive from your business as a self-employed individual as your pay, as noted in Part I, Revenue, of the Schedule C. 		   
   

Other Business Property
This is where commercial office rent or leases would be recorded. 		   
   

Other Expenses		 Covers anything else that is deductible but not listed, the most common will be software or apps that cost more than $200 (otherwise they can be listed as an office expense).

This is also where you will include accessibility and financing expenses such as screen readers, online service fees, bank and merchant fees, and credit card processing fees. 		   
   
Total (add up all expenses)    
   		    
   

MyFreeTaxes Self-Employed Tax Guide 
for Home-Based Child Care Businesses

Part I: Getting Ready for Tax Season

How does it work?

It’s easy! Head to MyFreeTaxes.com to get started. Once there, use our quick and easy tool to indicate whether you prefer to prepare your own taxes online or want to have your taxes prepared for you. After you tell us how you want to file, we’ll ask a few simple questions and connect you to the free tax filing options for which you are eligible. 

Over 70% of people are eligible for IRS-sponsored free tax filing services such as the Volunteer Income Tax Assistance (VITA) program, so there’s a good chance you qualify. In the off chance that you’re not eligible for free tax filing through VITA, we’ll connect you to alternative free tax filing options so you can still file for free.

Have questions or need support while using one of the tax filing options we recommend? Visit the MyFreeTaxes Support page to receive assistance from IRS-certified tax specialists via phone, email, or live chat, or refer to our FAQs and filing guides.  

What is the IRS VITA program?

For over 50 years, the IRS Volunteer Income Tax Assistance (VITA) program has provided free tax preparation services to qualifying individuals. In 2021, tens of thousands of VITA volunteers at 2,800 VITA sites across the nation prepared nearly one million returns for eligible filers and generated $1.7 billion in refunds. 

Most VITA sites provide services in person, but United Way’s MyFreeTaxes program provides VITA services virtually, enabling you to file your taxes for free from the convenience of your laptop, smartphone, or other digital device.

PRO TIP The IRS understands you may not have a receipt for every expense, so look closely at one or more documents that show the information they need: That you paid the expense; the amount you paid; the date you paid it, and a description of the item purchased, or service received.

Pros/Cons Standard Mileage Rate Regular (Actual Cost) Method
Pros Easy to do
Fewer records to collect and keep
Only need to track miles driven for business purposes		 May result in a higher deduction, especially if you use your car for work a great deal.
Cons Limited to a set rate per mile. Takes time to collect all the expenses and you need to hold onto the receipts.
Must log miles driven for business and personal purposes.
Time Miles Rate Deduction
January 1 to June 30, 2022 150 58.5 cents a mile $87.75
July 1 to December 31, 2022 340 62.5 cents a mile $212.50
TOTAL DEDUCTION $300.25

Keep in mind, when you use the standard mileage rate, you can still deduct parking fees and tolls accumulated as you are working.

If you use your car a lot for your work, you may want to use the Actual Expense method. It requires more record keeping but could result in a larger deduction. With the actual expense method, you will collect receipts or other proof of payments for all expenses related to your car.  The Vehicle Expense Worksheet included below can help you collect the total amount of your vehicle expenses.

PRO TIP Parking tickets and other violation fees are not deductible.

If you have a dedicated work vehicle, all expenses will be business expenses.

If you use your vehicle for work and personal expenses, you will need to multiply the total of your actual expenses by the percentage of miles driven for work. To determine this, you take your mileage log and divide the miles driven for work by the total miles driven in the year. You then multiply your total expenses by this percentage.

Here’s an example: A home-based child care provider logged 3,000 miles for business-related purposes. Overall, she drove her car for work and personal reasons for 10,000 miles over the year. She had $6,000 in actual car expenses. First, the provider will divide their miles driven for work, 3,000, by the total miles driven, 10,000, to come up with 0.30 or 30%. She will then multiply her total vehicle expenses of $6,000 by 30% to determine her business use of vehicle deduction, which would be $1,800.

Here is a worksheet that you can use to log your actual vehicle expenses, which will help you complete this portion of your Schedule C.

VEHICLE EXPENSE WORKSHEET

(Click here to access a digital version of this worksheet that you can download and use.)

CATEGORY DESCRIPTION TOTAL EXPENSES
Licenses & registration fees The cost of getting and renewing a license, inspections, and registration costs.    
   
Gas & oil The costs of gas or diesel fuel, as well as oil and oil changes for the car. This can also include charging costs for electric vehicles.    
   
Tolls Payments for accessing toll roads, highways, and bridges.    
   
Lease payments Payments for a leased vehicle used for work.    
   
Repairs & maintenance For the vehicle, including preventative checkups.    
   
Garage fees and parking To keep the vehicle on a regular basis (like an off-street parking garage in a city) or temporarily (such as airport parking while you wait to pick up a ride).    
   
Insurance For the vehicle, even if not required by your state.    
   
Total
(add up all expenses)		    
   		    
   

Deprecation of Your Vehicle

Another consideration if you are using the Actual Expense method is depreciation. If you use a vehicle for your work 50% or more of the time, you may want to also deduct part of the overall wear and tear on the car. You can learn more about this in the What is Depreciation? section.

How Do I Include the Costs of My Home?

As a home-based child care provider, if you are licensed and regularly use your home for your business, you can deduct the cost of your home and other related expenses.

To prepare for claiming these deductions on your return, whether you rent or own your home, there are two steps you need to take: 1) determining the space and time used for care and 2) determining the allowable expenses related to providing care in your home.

Let’s go through each one and know there is a table to record your answer below:

Step 1: Calculating the space and time use of your home

There are two elements that determine how much of your home expenses can be deducted: (1) the space regularly used for care and (2) the amount of time it is used on average. Calculating space and time for the percentage of your home expenses that are deductible is done by multiplying the percentage of space used in your home by the time it is used.

We are going to go through the calculation here, but there is also a spreadsheet you can use to make it even easier.

Space

Typically, space is measured in the square feet of your home that is used for care and the total square footage of your home. Exclusive use is space that is only used for child care and has no personal use. Regular use space includes areas that may be used all day for care (such as a play area) but also ones that are regularly used for only part of the day. To give an idea of an area that is only used part of the day, the IRS guide to auditing child care providers uses the example of a provider with three children who each nap in different rooms at quiet time (so they can rest better).

Though the other rooms are just used at nap time, it is a regular use and can be included in your calculation. As a rule of thumb “regular use” means you use the space two or more times per week.

You then take the space used in your home for care and divide it by the total square footage of your home to get a percentage:

Step 2: Collecting allowable expenses for your home

The full amount of expenses that are for your home and directly related to your business can go under your expenses under the applicable Schedule C line (as we mentioned under the section on expenses).

Now you want to focus on collecting indirect expenses related to your home, such as electricity usage, which is partially for your business, but also partially for your own use.

The table below includes many of the indirect home-based business expenses you can collect by looking at your receipts, bank accounts, credit care bills, checks, invoices, and app pay services (like Zelle and Venmo).

INDIRECT HOME-BASED BUSINESS EXPENSES

(Click here to access a digital version of this worksheet that you can download and use.)

INDIRECT EXPENSE NOTES TOTAL AMOUNT DEDUCTIBLE AMOUNT
(TOTAL AMOUNT X BUSINESS USE %)
Rent The full amount you paid over the year.
Mortgage Interest & Mortgage Insurance Payments Not mortgage principal
Real Estate Property Taxes
Electricity
Gas
Oil
Water
Home Phone, Internet, & Cable
Common Area Repairs Such as repairing the front steps of your home if they are used by clients when they stop by to meet with you.
Cleaning & Lawn Care Services
Homeowner’s or Renter’s Insurance
Other
Total

Make sure your tax preparation service is qualified.

All tax preparers should have an IRS Preparer Tax Identification Number (PTIN). Paid tax preparers are required to register with the IRS so be sure to ask for this in advance as they are not allowed to prepare your tax return without one. You can use this IRS directory to verify a preparer’s PTINs and credentials.

Ask if your tax preparer has any professional credentials. Enrolled agents (licensed by the IRS), certified public accountants, or attorneys all work as tax preparers. Other qualified preparers may be participants in the Annual Filing Season Program, bookkeepers, or certified financial planners.

You can search for qualified tax preparers in your area on the IRS Directory of Federal Tax Return Preparers.

Look at your tax preparation service’s history and experience.

Experience counts when looking for a qualified tax preparation service. In addition to checking for length of previous experience, make sure your tax preparation service has knowledge that is relevant to your specific circumstances. Ask if your tax preparer is part of any professional organizations or takes any continuing education classes to keep up to date. Make sure your tax preparer knows your state and local tax requirements in addition to federal return requirements.

Evaluate your tax preparation service’s costs.

It is important to properly evaluate the cost of your paid tax preparation options, as many paid tax preparation services may cost more than you realize. Here is some information that can help you ensure you don’t pay more than you intend.

Approximately how much might it cost to use paid tax preparation options?

  • If you have a typical home-based child care business and choose to use paid online software to file your return, you may pay $60-$250 depending on the features you choose (e.g., audit protection).

  • If you have a typical home-based child care business and choose to hire a paid tax preparer to file your return for you, you may pay on average $400 for the Form 1040 and Schedule C. This amount increases if you add itemized deductions and any other forms, such as quarterly estimated tax forms.

Remember, the entry cost is just the cost to file your forms, and the price may be higher if you elect to add on additional services and features.

Do not leave your original tax documents with the tax preparer.

Have the preparer scan or photocopy your documents if they need to work on your return while you are not there. You want to avoid leaving your important original tax documents with a preparer as you may have trouble getting them back. You may need your original documents later if you need to amend or resubmit your return or if you get audited.

Get a copy of your completed return as soon as it has been submitted.

You should keep a copy of your completed return for your own records. You may need a copy of your tax return to prove your income when applying for a loan or other financial product, and the easiest time to obtain a copy of your return is immediately after your preparer completes it.

Other questions to ask:

  • Is my tax preparer available after tax season?

  • Do they have a clear, upfront fee schedule?

  • Do they know how to deal with an audit?

  • Exactly how much time do they require to prepare and deliver a tax return?

  • How do you get a copy of your tax return?

Once My Taxes Are Completed, What Should I Do Next?

First, make sure that you get written confirmation that your state and federal taxes were submitted, either from your online tax software or from your tax preparer if you used one.

Make sure you have your own copy of your filed tax return and all documents included in your filing. It’s good to have a copy for your records and you never know when you might need a copy quickly.

While several of the online tax programs allow you to login at any time and print or download a copy of your return, tax preparers may or may not be easy to reach outside of tax season. In addition to the hard copy of all the documents in your tax return, we recommend that you have electronic copies as well. Digital copies can be made by scanning hard copies and converting them to PDF files, or taking photos of the documents with your phone, and saving the files on a secure device. 

PRO TIP You can use the IRS Get Transcript Tool to access your tax records online. Here, you can see your prior year adjusted gross income (AGI) and get all transcript types such as a Tax Return Transcript and a Wage & Income Transcript.

Finally, make sure all the original documents submitted to your tax preparer are returned to you. Keep all receipts, proof of payments, 1099s, and all other tax-related documentation for at least four years.

How can my business benefit from filing my taxes?

Taxes are often associated with confusing and overwhelming forms, anxiety about future audits, and fears of a large tax bill. But tax season can also be an opportunity for small business owners to save money, prevent future issues, and provide the documentation you need to grow your business, like a business loan.

When you are self-employed, you do not have paystubs to show a bank when you are seeking a loan. Giving them your bank records will not be sufficient. What most lenders look for are financial statements to show your business’s income, and your tax returns to show your personal income history. Often, lenders will use Line 31 (Net Income) on your tax return to prove your income for a mortgage or business loan.

PRO TIP Around half of all individual tax returns are filed without the use of a professional tax preparer. If you’re comfortable using email and online banking services, we think there is a good chance you can comfortably prepare your own return for free using MyFreeTaxes. Head to MyFreeTaxes.com to get started and consult the MyFreeTaxes Self-Employed Tax Guide for in-depth help completing your return using free online software.

What Business Resources Can I Access for More Training on Taxes and Other Business Topics?

America’s SBDC represents America’s nationwide network of Small Business Development Centers (SBDCs), the most comprehensive small business assistance network in the United States and its territories. Sponsored by the US Small Business Administration (SBA), they provide management assistance to small business owners in the form of one-on-one counseling, training seminars, assistance with SBA loans, and technical assistance.

Small business owners and aspiring entrepreneurs can go to their local SBDCs for free face-to-face business consulting, and at-cost training on a variety of topics. There are nearly 1,000 local centers available to provide no-cost business consulting and low-cost training to new and existing businesses.

You may also call 211 to get connected to additional resources and services that can help you, your family, and your business.

Year-Round Tax and General Business Resources

Now that you’ve filed your tax return this year, consider changes you might make to help the process go even smoother next year! The following pages include additional resources that may help you learn more about certain tax topics and business practices that can improve your business operations and tax filing experience.

Resource 1: Mileage Log

Resource 2: Assessing Last Year’s Taxes

Resource 3: Payroll Taxes (For Businesses With Employees)

Resource 4: Quarterly Estimated Tax Payments (For Self-Employed Individuals)

Resource 5: What to Look For In a Business Bank Account

Resource 6: How Can I Create A Simple Financial System For My Business?

Resource 7: What Is Depreciation?

Resource 1: Mileage Log

Click to access the digital version of this worksheet you can download and use.

DATE DISTANCE LOCATION PURPOSE
11/2/2022 5.5 miles Burbank Wal-Mart Picking up supplies
TOTAL DISTANCE (ADD UP ALL YOUR ENTRIES) MULTIPLY BY THE IRS PER MILE RATE TOTAL EXPENSE AMOUNT
   
   		 0.585
(1/1 through 6/30/2022)

0.625
(7/1 through 12/31/2022) 		   
   

The IRS standard mileage rates for 2022 are available here:

https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022

Resource 2: Assessing Last Year’s Taxes

Luminary Evaluation Group created the Confidence in Quality Tax Prep Rubric© for Child Care Providers so that a provider or partner can evaluate if their federal tax returns are consistent with best practices for their program type. This rubric was informed by an analysis of a set of child care provider tax returns. It can be used widely, especially by organizations who offer business technical assistance to childcare providers, to ensure they are applying these practices. Providers can also use this rubric with their paid preparer to guide tax preparation or feel empowered to submit their own returns and save several hundred dollars on fees. The rubric can also be used to retroactively review past submitted tax returns.

Through this opportunity for the assessment of past taxes, providers can search for errors and amend returns for up to three years, receiving back money they overpaid in already submitted returns. This rubric has been created under a Creative Commons CC BY-NC license allowing use and adaption with attribution and for non-commercial purposes.

There are several different terms that are associated with the tax return process. To help make them more understandable, we have created a glossary of the most common terms.

Disclaimer: The information in this rubric does not constitute tax advice. Individuals should always seek professional advice or actual guidance from the Internal Revenue Service (IRS) if they have any questions regarding their tax returns.

GLOSSARY

Money coming into your business

Revenue/Income is the total income your business makes by selling goods or delivering a service. This will be reflected on Line 7.

Net Profit, also known as Taxable Income, is how much money is left after all your business costs are deducted from all of your revenue. This will be reflected on Line 31 as a positive dollar amount. Profit = revenue minus expenses.

Money going out/costs to conduct your business

A Loss is when your costs to conduct business exceeds the income that you had come in. This is the opposite of profit, reflected on Line 31 as a negative dollar amount.

Expenses refer to any amount of money that you spend on anything within your business. The IRS categorizes allowable expenses on lines 8 through 27a.

Depreciation is a way to allocate the costs of a fixed asset over the period in which the asset is useable to the business. You record the full transaction when the asset is bought, but the value of the asset is gradually reduced by subtracting a portion of that value as a depreciation expense each year. Noteworthy things that depreciate are vehicles, homes or other buildings, furniture, and equipment. Businesses will enter their depreciation expenses on Line 13.

Money you owe as a result of doing business

Tax Liability for sole proprietors is the amount of tax they are required to pay. In their case, 92.35% of their net profit is first subject to a self-employment tax of 15.3%. The remaining profit is taxed as income, at their individual tax rate. The lower your profit, the lower your tax liability will be.

Money the government owes your business

Deductions can help reduce your tax liability. You can deduct certain expenses which will subtract the cost of the expenses from your taxable income. Allowable expenses are already categorized on Lines 8 through 26. However, you may have other expenses that do not fit into those categories. Those other expenses should go on Line 27a. The result of using deductions is to lower your tax liability (the amount of taxes you owe).

A Refund is owed to you if you paid the IRS more than you owed during the prior year. For example, if your quarterly estimated tax payments paid during the year add up to more than you owe when you file your tax return, then the IRS will owe you a refund. The difference will come back to you in the form of cash paid via direct deposit or check.

An inspection of your tax records

If the IRS issues an audit, they are investigating whether the financial information reported on your taxes accurately reflects your financial records and is reported according to tax laws. Some tax filing mistakes increase the likelihood that the IRS will select your return for review. If your return is selected for review (audited), you will be asked to provide documentation supporting the information you recorded on your tax return.

Confidence in Quality Tax Prep Rubric©

A 2022 Form 1040 Schedule C Tax Form Rubric


LINE ENTRIES		 COMMONLY USED FOR SMALL BUSINESSES?
NOTES
Gross receipts (Line 1) Required Enter all revenue earned for the year and should include all parent fees paid, subsidy revenue, and food program payments you received.
Cost of goods sold (Line 4) No Use of this Line could trigger an audit alert since it would be extremely uncommon (if ever used) in childcare.
Gross profit (Line 5) Required This will usually be equal to Line 1.
Advertising (Line 8) Yes Enter all expenses for ads, flyers, business cards, and promotional materials.
Car and truck expenses
(Line 9)		 Yes, use caution Providers can deduct the actual expenses of operating their car for business (gas, oil, repairs, insurance, license plates, tolls, parking, etc.) by calculating the percentage of time that the vehicle is used for business.


Alternatively, they can perform the Standard Mileage rate calculation: multiply the number of business miles driven by 58.5 cents for 1/1-6/30 and 62.5 cents for 7/1-12/31 then add to this amount your business portion of car loan interest and parking fees and tolls. You must be able to document how you came to the total entered.
Commissions and fees
(Line 10)		 No Providers using this expense are encouraged to seek professional advice.
Contract labor
(Line 11)		 Yes, use caution Enter all payments made to 1099 contractors. Providers should be mindful not to misclassify employees as contractors. For more information on classifying workers, see When Is Someone a Contractor or Employee?
Depletion (Line 12) No Providers using this expense are encouraged to seek professional advice.
Depreciation (Line 13) Yes, use caution Depreciation must be applied only for business use of certain property. Providers using this expense are encouraged to consider seeking professional advice. Review What is Depreciation? to learn more about Depreciation.

Employee benefit programs (Line 14) 		   
Yes, use caution   
If you offer employee benefits, enter amounts paid for employee benefits (i.e., health plans, supplemental insurance, life insurance).

This is not a typical expense for home-based providers.

Providers using this expense are encouraged to seek professional advice.

Insurance (other than health) (Line 15) 		   
Yes   
Enter amounts paid for liability insurance and any other business-related insurance.

Mortgage Interest (Line 16a) 		   
Yes   
Enter amounts paid in mortgage interest on an owned business property. For home- based providers this is likely a part of their time/space calculation already.

Other interest
(Line 16b) 		   
No   
This refers to other interest such as credit card interest. Providers using this expense are encouraged to seek professional advice.

Legal and professional services (Line 17) 		   
Yes   
Enter amounts paid for legal and other services such as accounting, consulting, tax prep, etc.

Office expense
(Line 18) 		   
Yes   		    
Enter amounts paid for office supplies and postage.   

Pension and profit sharing
(Line 19) 		   
No   
This must be a company sponsored program (i.e., not the providers’ personal or spouse’s retirement plan).

Providers using this expense are encouraged to seek professional advice.

Vehicle Rent or lease
(Line 20a) 		   
Yes   
Enter the business portion of your vehicle rental or lease cost. For a company car, this would be 100% of costs.

For use of personal vehicle for business-related purposes, enter business related costs only.

Other business property rent or lease (Line 20b) 		   
Yes   
Enter the amounts paid for renting business property.

For home-based providers, this is likely included in their time/space calculation already.

Repairs and maintenance
(Line 21) 		   
Yes   
Enter amounts for repairs and maintenance made in the child care facility.

Home-based providers should include repairs made to spaces used for child care. If the repair is of a common area, that would be captured in the time/space calculation.

Supplies (Line 22) 		   
Yes   
Enter the amounts for materials and supplies (i.e. – classroom supplies, learning materials, toys, diapers and wipes, cleaning supplies, etc.)

Taxes and Licenses (Line 23) 		   
Yes   		    
Enter the amounts for license fees.   

Travel (Line 24a) 		   
Yes   
Enter amounts for lodging and transportation associated with business travel (i.e., conference attendance).

Deductible meals
(Line 24b) 		   
Yes, use caution   
Enter the amounts for your meals while on business travel or business-related meetings.

Note that this Line should not be used to claim food expenses for children’s meals. Those expenses can go on Line 27a, Other expenses.

Utilities (Line 25) 		   
Yes   
Enter amounts paid for utilities for the child care facility.

For home-based providers, this is likely included in their time/space calculation already.

Wages (Line 26) 		   
Yes, use caution   
Enter the total salaries and wages for the year for W-2 employees and yourself (if you pay yourself through payroll).

For more information on paying yourself, see Paying Yourself: A Guide for Sole Proprietors.

Other expenses
(Line 27a) 		   
Yes   
Enter amounts for all other expenses that do not fall into the above categories (i.e., professional development expenses, membership fees, special events for the children, children’s food expenses, etc.).

# of expenses claimed 		   
   
This number should never be zero. There will always be expenses to claim for your small business.

Total expenses (Line 28) 		   
   		    
This is the sum of all claimed Schedule C expenses.   

Business Use of Home (Line 30) 		   
   
Home-based providers operating from their primary residence should always claim the business use of home deduction. This applies to expenses that have a shared personal and business use. If a provider has an expense that is 100% business use, that expense should be fully claimed on the applicable expense line.

Business use of home does not typically apply to center-based programs.

Time/space percentage (%) 		   
   		    
To calculate time/space, view this worksheet.   

Time/Space ($)
(Line 30) 		   
   		    
Amount calculated from worksheet.   

Net profit or loss
(Line 31) 		   
   		    
This is your revenue minus expenses.   

Resource 3: Payroll Taxes (for businesses with employees)

Learn how to understand your payroll tax obligations as an employer.

What are Payroll Taxes?

Payroll taxes are taxes that employees and employers must pay on wages, salaries, and tips. The employee pays their portion of these taxes through a payroll deduction and the employer pays the rest directly to the IRS. Typically, the employer will report payroll taxes using Form 941, Employer’s Quarterly Federal Tax Return.

There are different types of payroll taxes:

  1. Federal income tax

  2. Social Security and Medicare (also known as FICA)

  3. Federal Unemployment (also known as FUTA)

How much are Payroll Taxes and when are they due?
Some payroll taxes are a fixed percentage of wages, and some are dependent on the employee’s tax bracket. There are also various due dates for these taxes. Here is a helpful chart that describes the tax, the amount, who is responsible for paying it, and when it’s due:

What forms must be completed?

  • Form W-4 – completed by employee to let the employer know how much payroll tax to withhold. The amount withheld will be calculated based on their marital status, number of dependents, and any additional withholding they may choose. This is completed once an employee is hired, prior to their first paycheck and can be updated by the employee if their tax situation changes.

  • Form W-2- you must file Forms W-2 to report wages paid to employees. This must be issued by January 31 to any employee with wages withheld during the previous tax year.

  • Form 941 – used to report income taxes, Social Security tax, or Medicare tax withheld from employee's paychecks and can be used to pay the employer's portion of Social Security or Medicare tax. This is due quarterly by the last day of the month that follows the end of the quarter:

Tax Type Amount Due Date Responsible Party
Federal income tax Varies, based on individual
withholding status. 		Withheld from each paycheck
issued; paid to the IRS from
employer monthly if you
reported $50,000 or less in
taxes July 1 – June 30 of the
previous tax year and
semi-weekly (twice a week)
if total taxes reported were
more than $50,000. 		Employee, but employer
must withhold based on W-4
received.
FICA Social Security – 12.4% Employer and employee
each pay 6.2%
Medicare – 2.9% Employer and employee
each pay 1.45%
FUTA 6% on the first $7,000 in
wages paid per employee,
each year. 		Quarterly Employer
Quarter Months in the Quarter Form 941 Due Date
1 January, February, March April 30
2 April, May, June July 31
3 July, August, September October 31
4 October, November, December January 31

  • Form 940 – used to report any FUTA tax. The due date for filing the Form 940 is January 31.

What about part-time workers?

Part-time workers and workers hired for short periods of time are treated the same as full-time employees for federal income tax withholding and social security, Medicare, and FUTA tax purposes.

What about family employees?

One of the advantages of operating your own business is hiring family members. However, employment tax requirements for family employees may vary from those that apply to other employees. View the Family Help resource to learn about the tax requirements for family employees.

For more information, review IRS Publication 15, Employer’s Tax Guide.

How to determine if someone is an employee or 1099 contractor?

Employees and contractors are treated very differently under federal and state law. Contractors are considered independent business people. They pay their own employment taxes and the employer usually has fewer legal obligations to the individual, such as providing paid time off. Employees, on the other hand, come with greater costs, like employment taxes and benefits.

There are rules that determine if a person should be considered an employee or a contractor and there can be harsh fines if you misclassify an employee as a contractor.

In determining if you have a contractor or employee, you should look at the three essential elements of the definition of employment: service, wages, and direction and control.

PRO TIP Don't use Forms 1099 to report wages and other compensation you paid to employees; report these on Form W-2.

  1. Service (Type of Relationship)– Does the person work on a project-by-project basis (like a contractor)?   Does the person work for other businesses or just for you?

  2. Wages (Financial)— How is the person paid? For example, is the person paid every week for a set number of hours (which indicates an employee), or does the work vary (like a contractor)? Do they have regular expenses that are reimbursed (like an employee)?

  3. Direction (Behavioral) — How much control do you have over their day-to-day work? For example, do you set the requirements around their work hours, the equipment or tools to be used, or the training needed? (If yes, then this person is likely an employee.)

For more guidance, run through the IRS list of 20 factors that indicate if someone is a contractor or an employee.

Disclaimer: The information contained here has been prepared by Civitas Strategies Early Start and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies Early Start team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information is not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited.

Resource 4: Quarterly Estimated Tax Payments (for self-employed individuals)

Key Terms

Self-employment tax - a Social Security and Medicare tax primarily for individuals who work for themselves. The SE tax rate is 15.3% (12.4% for social security tax and 2.9% for Medicare tax) and it is applied to 92.35% of your net earnings from self-employment.

Quarterly estimated tax - Estimated tax is the method used to pay your self-employed Social Security and Medicare taxes and income tax. Those who are not self-employed will have an employer withholding these taxes for them and paying these taxes at regular intervals to the IRS. Because you do not have an employer doing that for you, you need to pay them yourself, quarterly.

Income tax - self-employed individuals generally must pay self-employment tax as well as income tax. Income tax is tax on personal income. For a self-employed person, their personal income is their net profit (Line 31 of the Schedule C). Income tax is also paid on all other types of income you may have (for example, capital gains). Your income tax rate will depend on a number of things such as your filing status, household income, and whether you have any dependents.

What are quarterly estimated taxes?

Quarterly estimated taxes are estimated self-employment (SE) tax payments you may need to make to the IRS four times a year. Self-employment taxes are taxes that freelancers, independent contractors, and other business owners pay towards Medicare and Social Security. W-2 employees have these taxes taken out of their paychecks by their employer. However self-employed people need to pay these taxes to the IRS themselves. Typically, the deadlines for these payments are on the 15th of April, June, and September of the current year, and January of the following year:

Payment Period Due Date
January 1 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
September 1 – December 31 January 15 of the following year

Making quarterly estimated self-employment tax payments during the year means that you pay most of your tax during the year, as you receive income, rather than owing one large amount at the end of the year. These payments are based on your estimated income for the current year.

View When to Pay Estimated Tax for more information.

Do I have to pay quarterly estimated taxes?
Self-employed individuals generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their income tax return is filed.

If your net earnings for the year are greater than $15,000, you will likely owe at least $1,000 in self-employment taxes and therefore will be required to make quarterly estimated self-employment tax payments. This assumes you have no dependents and no other personal credits on your income tax. If you do, then you may be able to have a higher net earnings before you’re subject to making quarterly payments.

Find more information on whether you will need to pay quarterly estimated taxes in the IRS FAQ.

To avoid making quarterly payments, you can also have your spouse withhold enough in taxes to cover your Social Security/Medicare and income taxes. If you are single or you have a spouse who is unemployed or self-employed, you will most likely need to file quarterly estimated taxes.

You can also make monthly estimated tax payments which may be easier to budget than paying a larger amount quarterly.

How much do I pay each quarter?

Any self-employed business must pay a 15.3% self-employment tax (which is both the employee and employer portions of the Medicare and Social Security taxes). The amount is calculated with the 1040 estimated tax form. You must pay at least 90% of the taxes you owe for the quarter to avoid paying a penalty.

To get a rough estimate of how much you owe each quarter, add up all your income and multiply it by 20%. If you pay that 20% and it’s more than you actually owe, you will get a refund at the end of the year. If it's too little, you will owe some additional taxes when you file your tax return.  It's unlikely that you will face a penalty if you pay greater than 20% of your income in taxes each quarter.

For Example:

DESCRIPTION EXAMPLE AMOUNT YOUR AMOUNT
Self-Employed Net Income (Schedule C, Line 31)
This is your profit after deducting business expenses from your revenue.		 $15,000    
   
Self-Employed Income Subject to Self-Employment Tax
This is 92.35% of your net income 		$13,853
($15,000*0.9235)		    
   
Self-Employment Tax
This is a 15.3% tax on the amount of your self-employed income subject to
self-employment tax. 		$2,120
($13,853*0.153) 		   
   
CREDITS
Self-Employment Tax Credit
Self-employed individuals receive a 50% credit on their SE tax 		$1,060
($2,120*0.5) 		   
   
Other credits
Enter any additional credits that you are expecting to receive when you file
your tax return. This can be the Earned Income Tax Credit, Child Tax
Credit, Child and Dependent Care Tax Credit, or the American Opportunity
Tax Credit.
$0		    
   
TAX OWED & QUARTERLY ESTIMATED TAX
Tax Owed
This is the amount you get when you subtract all expected credits from all
anticipated tax owed (this is SE tax plus any other personal tax liability).
*If this amount is over $1,000 you must make quarterly estimated payments.
*If it’s below $1,000 you do not have to make quarterly estimated payments.
$1,060
($2,120-$1,060) 		   
   
Quarterly Estimated Payments
This is the amount you may be required to pay to the IRS quarterly. 		$265.00
($1,060/4) 		   
   

Resource 5: What to Look for in a Business Bank Account

Learn about Opening a Business Bank Account

Setting up a business account is the best first step to ensuring that you’re clearly separating your personal and business revenue and expenses.  Once set up you will easily “see” what money is in your business versus your own pocket, and it will be easier for you to do your bookkeeping and taxes.

This resource, and the following resource, will walk you through the basics of developing a financial system for your business. This consists of two important steps — getting a business bank account and adopting a bookkeeping system.

Getting a business bank account can be simple. As a sole proprietor, you have multiple options. You are not required to have a traditional business bank account, however the best practice is that you at least have a separate account for your personal and business finances. You may want to use the bank that holds your personal accounts already or you may want to look for the best deal for your business. We recommend that you look at two or three options to be sure you are making the right choice.

What are the features of a Business Bank Account?

Typically, a business bank account requires you to have an Employer Identification Number (EIN) and offers features that do not come with a standard personal account. Some of those features include:

  • Protection services for you and your customers

  • Allows for credit card payments to you directly, not through a payment processor

  • Credit options that will allow your business to grow or use in emergencies

  • Helps establish your business credit

For more features and details on business bank accounts, view Open a Business Bank Account by the U.S. Small Business Administration.

Choosing a Bank

In selecting a bank for your business account, first and foremost, relationships are important. You want to make sure that the bank will be responsive to your needs and your questions and provide the opportunity to grow over time. Once you’ve established a relationship with your bank, you may be eligible for financial supports such as a business loan or a line of credit that could help you to grow your business. Look for a bank that offers these services.

Think about how the bank treats you from the moment you first walk in the door. Do they seem eager to talk? Does the bank employee appear to want your business? If the bank isn’t excited to see you when you are a prospective customer, they are not very likely to be there when there’s an issue and you need them the most.

If a bank appears friendly and welcoming, you should consider four other points:

  1. Does the bank require you to deposit a certain amount of money to open the account?
    Understanding how much money may be tied up in the account is important. If the bank requires you to keep a minimum balance, it will then be money that you cannot access easily if you have bills to pay or want to pay yourself.

  2. Are there fees associated with the account? What are they?
    Banks make money by charging fees for their services, but these seemingly small fees can add up quickly.  You will need to factor them into your routine expenses.

  3. How many checks can you write a month? How many deposits can you make?
    Some banks will place limits on the number of checks, transactions, and deposits that can be made during each billing period. After you reach your thresholds, the bank will charge a fee for each transaction. Again, this is going to erode how much money you're making, so it's imperative that you know what the fees are and whether they fit the style of your business.

  4. Will you need a debit or credit card for your business? Do you want the ability to use a credit card that is issued by your bank?
    These are important services, and again, going to the earlier point, may also come with fees, so you want to look very closely at these. 

Decision Time

Review the account options, services, and fees at two, three, or four banks, setting aside any that don’t pass the “relationship” test. Then consider the remaining banks. What is the best deal? Think about how much money you are willing to have tied up (i.e., the minimum balance) and how high the fees will be per month, based on your current banking.

For example, Marta is considering two banks, Bank A and Bank B. Bank A has a higher minimum deposit of $500, but their fees are lower. Based on the number of checks Marta writes a month and that she doesn’t need a debit card, Marta calculates that the fees for Bank A would only be $5 a month. Bank B has higher fees, totaling $8 a month, but no minimum deposit.

The account Marta chooses will depend on her personal and business needs, finances, and preferences.

There Are Trustworthy, Affordable Options for a Personal Bank Account, Too!

Having a safe, affordable, personal bank account is essential to your financial wellbeing.  If you don’t already have a bank account, we recommend opening an account that meets  the Bank On National Account Standards. These accounts take the stress out of banking by charging only $5 or less per month with no overdraft or insufficient fund fees and include convenient features like Bill Pay or free checks you can use to help pay rent and other bills without using expensive money orders. These accounts are also great options for anyone with a limited or challenging banking history.
You can review the full list of available Bank On certified accounts you can open online here. Unsure how to open a bank account? Check out United Way’s My Smart Money guide to getting a bank account for easy-to-follow instructions.

Resource 6: How Can I Create a Simple Financial System for My Business?

Learn about Basic Bookkeeping

At the heart of any successful business is a good financial accounting system. An accounting system is critical because it lets you know where your money is, where it is going, and how much you're making. Having this information readily available will let you pay yourself without putting your company at risk, manage cash flow so that you always have enough money to pay your bills, and know when it's time to expand your business.

Developing a bookkeeping system

Once you have your business bank account, you can start to think about a basic system for bookkeeping. Bookkeeping is very important because it will help you understand where your money is coming from (tracking revenues), where it is going (monitoring expenses), and how much profit you're making (managing cash flow). Profit is just a fancy way of saying how much money is left after you pay all your bills.

Step 1
Determine how you will account for funds coming in and going out.

There are two basic methods in accounting — one is an accrual method, which is more complex and is based on when an expense or a revenue is taken on, or accrued. For example, if using the accrual method, the moment you receive your credit card bill, the amount owed would be taken from your assets (versus when you actually pay the bill). If using the cash method, this amount would be taken from your assets when the bill is paid. The cash method is more common for businesses and is less challenging, as it is based on when things are paid or received.

Let’s look at revenues. Let’s say a client owes you $300. Under the accrual method, that $300 is considered income at that time even though they haven’t paid you yet. Under the cash method, the $300 wouldn't be considered income until the client gave you the check and you deposited it. For most small businesses, the cash method is both simpler and more helpful because it's going to let you know exactly when money is coming in and out of your account. This method is more comfortable because it matches the act of balancing your checkbook.

Step 2
Determine how you will record your transactions.

After deciding how you will account for funds, you need to determine how you're going to record your transactions. For many small businesses, it is easiest to record transactions on a sheet of paper or on a spreadsheet, such as Microsoft Excel or Google Sheets. Setup some simple categories to start.

Begin with your income. Determine what the key revenue streams are for your business — that is, the sources from which you primarily receive your money. Parent fees will likely be one source; another might be a child care subsidy or payments from a food service program. Perhaps there are additional funds that you receive for after-school students or grant funds. Each one of these will be a separate revenue stream to account for.

Next, list your expenses. This may include items like payroll, cleaning, rent, repairs, supplies, and other categories that match your business. Try to limit the number of categories — you don't need to detail every category that might occur. Focus on the categories you have right now; you can always add more later. With too many categories, the list could become overwhelming, making it difficult to account for spending or revenue.

You can use this example list to categorize your income sources:

Revenue Categories
Income category #1
Income category #2
Income category #3
Fees
Other

You can use this example list to categorize your expenses:

Expenses Categories
Personnel
Taxes
Mortgage/Rent
Utilities
Car lease
Phone
Supplies
Inventory
Cleaning
Insurance
Loan payments
Bank fees
Other

Step 3
Set a schedule to record and review your transactions.
You should set a time to update your books, at least every month. Start by looking at all your revenue sources: cash, credit cards, app payment systems like Venmo or Zelle, and checks written to you. Enter each one into your income on your spreadsheet. Next, record your expenses. Look through your receipts, bank and credit card statements, and invoices from people you have paid. Any of these proofs of payment can help you to not only record these costs, but more importantly, ensure that you're recording the correct amount for each one.

Though it may seem tedious to record each transaction, it helps you track your profitability and lets you see where your money is coming and going. Once you have recorded your revenue and expenses for the month, you will then total each category. Subtracting your revenue from your expenses will give you an idea of how much profit you made that month. You may want to consider holding onto some of that profit, leaving it in the business for a rainy day or to help pay your bills.

You can use this helpful template to record and track your monthly revenue:

What revenue did I receive?
Date Description of what I was paid for Amount Received Category
Total

You can use this helpful template to record and track your monthly expenses:

What did I pay for?
Date Description of what I paid for Amount Paid Category
Total

Bookkeeping Pro-tip:
Label your receipts so that you remember which category they belong in.

Accounting Pro-tips:
Stick to a regular schedule! Make sure you regularly update your records, whether monthly, every other week, or every week. This will save time and headaches in the future. Leaving your expenses and revenue to pile up will not help you. You can’t understand how your business is doing on a moment's notice, nor will you be able to keep up with your accounting system if it involves an intimidating pile of receipts and statements. 

Consider an electronic system. It can be tedious to do accounting by hand. So, you may want to create a simple spreadsheet or even get an online system.

When looking for online systems like QuickBooks, FreshBooks, or Xero, consider their ease of use, cost, and complexity. Many of you with a small business may not need QuickBooks or other more complicated systems. Perhaps a simpler, less expensive system that is easier to use would be preferred and work better for your goals.

Make sure you keep all your records, whether you take photos or scan each receipt and statement and save them electronically, or just store everything in a box. It is important to save these documents in case you are audited by the IRS. It also allows you to go back and check your information, if needed.

Disclaimer: The information contained here has been prepared by Civitas Strategies Early Start and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies Early Start team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information is not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited.

Resource 7: What is Depreciation?

Understanding depreciation and how it impacts your financials.

Key Terms

Asset - property you acquire to help produce income for your business. Assets are subject to depreciation. An asset is a single item, not a group of items. For example, an office sofa that costs $3,000 rather than 10 chairs that were $300 each.

Basis – the full cost of an asset to you, includes purchase price, sales tax, freight and other costs.

Depreciation - an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. Usually, you must depreciate single item purchases over $2,500.

Improvement – a renovation that enhances the value of or improves the life of property.

Repair – fixing the normal "wear and tear" of an item, such as replacing shingles that fell off, but not the whole roof.

Time-Space – a calculation that allows home-based child care businesses to determine their business use of certain property. Providers must first apply time-space to the item or property before calculating allowable depreciation. Learn how to calculate your time-space here.

Depreciation can be confusing, but if you make any single asset purchases or property improvements over $2,500 for your home-based child care business, such as cars, furniture, computers, a new roof, or have a dedicated home office in a home that you own, you need to understand depreciation and how it can impact your business.

Depreciation impacts the timing of revenue and expenses, which may increase your taxes when you make a large purchase or improvement but lowers your taxes in future years. Typically, when you have an expense, it is fully deducted in that year “offsetting” the same amount of earnings. For example, let’s say your business earned $100 in revenue and you decided to buy a $100 table for your business. You made $100 and you get to deduct $100, so the impact on your taxes is $0 – since the $100 was spent on a deductible expense.

Depreciation changes this offset. Let’s say you used $20,000 in revenue to purchase a new van. In this case, your taxes would reflect the $20,000 in revenue, but you would only be able to deduct $4,000 in the first year (we’ll explain why later). As a result, you would have $16,000 in taxable revenue (that is, the $20,000 - $4,000 in depreciation leaves $16,000 in revenue) for that year. You will depreciate the rest of the van expense in subsequent years.

In this resource, we’ll review the basics of depreciation and how it works so you can understand when you need to prepare for higher taxes and when you don’t.

This document should not be considered tax advice. Please consult with an accounting professional for specific guidance and information regarding depreciation for your business.

What is depreciation?

Whenever you make a business purchase that you will use for more than one year, the Internal Revenue Service (IRS) requires it to be depreciated. This means that you will deduct the cost on your business taxes over time, rather than only the year when you purchase it.  Instead of getting all of the deduction in one year, you get it slowly, over a number of years.

Depreciation can apply to many things in your business including:

  • Furniture

  • Appliances such as dishwashers

  • Computers

  • Buildings that you own and renovations

  • Vehicles

What is the difference between renovation and repair? A renovation is a structural change to the foundation, roof, floor, or exterior or load-bearing walls of a facility or extending an existing facility to increases its floor space. If an existing facility’s function or purpose is significantly changed, this is considered a renovation as well. A repair service or part restores an existing building or piece of equipment to optimal working condition. A repair does not change the function or purpose of what is being fixed. A repair is never depreciated, but a renovation always is.

What is subject to depreciation?

To determine if a purchase that you make for your business is subject to depreciation you need to ask the following questions.

  1. Is the item “ordinary and necessary” for your business? – that is, do you need this to run your business?
    If it is, then move to the next question.  This is an interesting opportunity for home-based child care business owners since it may make home improvements eligible for deductions (more on that later in this resource).

    If it is, then move on to the next question. If the item is not “ordinary and necessary” for your business, then it is a personal expense that is not deductible on your business taxes at all.

  2. Can the item last more than one year? – For example, paper towels will likely be used up in a year, so they would not be eligible. However, a desk or a newly installed deck (for a home-based child care provider) would be items that will last more than one year.
    If the item can last more than a year, then move to the next question. If the item cannot last more than one year, then treat it as a typical business expense that would not be subject to depreciation.

  3. Is the value more than $2,500? – Any item, even one that could last for years, that has a value of less than $2,500 is considered a “safe harbor” and can be deducted all in one year and without being subject to depreciation. Keep in mind, that this is a per-item limit. For example, if you purchased 50 chairs for $100 each, even though the total bill was $5,000, each chair is less than $2,500 so depreciation will not need to be applied.

    If the value is more than $2,500, then move to the next question. If it is less than $2,500, then treat it as a typical business expense.

  4. Is this a repair or maintenance cost? – Costs to repair or maintain items for your business, including your home for child care providers, can be expensed in one year and will not be subject to depreciation. For example, let’s say you have your roof shingles repaired and it cost $3,500. As a repair, you would still be able to deduct it in one year and depreciation will not be applied.

    If it is not a repair or maintenance cost, you’ll need to depreciate the item. If it is a repair or maintenance cost, report it as an expense on your tax return.

Looking for a printable version? Download the PDF of this Tax Guide for Home-Based Child Care Businesses here.

For an overview of the information contained in this guide, watch our video here:

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As you can see, many red flags can be easily avoided through proper understanding of and preparation for your taxes.

OTHER INCOME (SUCH AS GRANTS NOT ASSOCIATED WITH A 1099)
Payer Name Purpose Amount
   
   		    
   		    
   
   
   		    
   		    
   

   
   		    
   		    
   
   
   		    
   		    
   
   
Total (add all of them together)   		    
   		    
   

To collect your expenses, begin by collecting all your receipts. Next, go month by month in your records for 2022:

  • Review your credit card bills.

  • Check app-based system payments (such as Venmo, Zelle, PayPal, and Square Cash).

  • Look at your bank statements and checks.

PRO TIP Each year, create a folder for each of the expense categories above. Throughout the year, place receipts in the correct folder and update your expense sheet.

Time

Time is the total number of hours you used your facility on average. This includes not only the time that you are caring for children, but also the time you used the space for cleaning, cooking, and preparing for the care of children. You can also include the time when your business was closed but you were preparing to open.

DESCRIPTION EXAMPLE YOUR HOME

Square feet exclusively used for care.

Exclusive use areas are only used for childcare business purposes and no personal purposes whatsoever. If no exclusive use, enter 0.
0 		   
   

Square feet regularly used for care

Regular use areas are shared for both personal and child care business purposes.
500 		   
   

Total square feet of your home.

Include square footage of your basement, garage, porch, and deck in addition to the interior of your home. Do not count patios or yard space, even outdoor play areas.
1,100		    
   

Exclusively used space percentage.

Divide spaced used exclusively by the total square feet in your home for a percentage.
0% 		   
   

Regularly used space percentage.

Divide spaced used regularly by the total square feet in your home for a percentage.
45.4% 		   
   

Total time, in hours, spent a year for care.

This can include activities such as bookkeeping and paying bills, planning lessons/activities, purchasing supplies online, communicating with families, any online trainings, and cleaning. Keep track of these other non-direct childcare tasks for your records. The best way to figure out your total time is to multiply the average number of hours you work each week and multiply it by the number of weeks you provide care during the year. Exclude any days you were closed and did not perform any business activities.
2,890
Total hours in a year.
8,760
8,760

Divide the time spent for care by the total number of hours in a year to create a percentage.
32.9%

Multiply your regularly used space percentage by the time percentage.

If you have no exclusively used space, this is your Time-Space Percentage. You’ll use this percentage to deduct your business use of home expenses for your in-home child care services.
45.4% * 32.9% =

14.9% 		   
   

If you have exclusively used spaces: Add to your regularly used Time-Space Percentage to your exclusively used space percentage. If you don’t have exclusively used spaces, skip this step.

It will be: Space percentage (%) of exclusive use area + (regular use space percentage (%) * time percentage (%)).

This will weigh your exclusively use areas higher in your Time-Space Percentage. This is your Time-Space Percentage. You’ll use this percentage to deduct your business use of home expenses for your in-home child care services.
N/A in example 		   
   

For example, let’s say your business is open and providing care for children 10 hours a day. During the hours that you are closed, you clean and set up for two hours a day. Combined, this would give you 12 hours a day that you were using your facility. Then, let’s say you were closed for four weeks but did 10 hours of work in this time to maintain the space and prepare for re-opening. Your total hours would be:

12 hours a day x 5 days a week x 48 weeks +10 hours when you were closed = 2,890 hours

You can create a percentage of the business use of your home by dividing your total hours used for care by 8,760 (the total hours in a year).

For example, our provider above uses her home for care 2,890 hours a year. When you divide 2,890 by 8,760 you find that her home is used for business 0.329 or 32.9% of the time.

To calculate how much of your home expenses you can deduct, multiply the Space of your home you use for your business by the Time you use your home for the business. Then multiply the result by the costs of your home.

In our examples above, the provider is using 45.4% of her home (Space) for care that is provided 32.9% (Time) of the year. If she multiplies 45.4% times 32.9% she gets 14.9% (0.454 x 0.329 = 0.149). So, she can deduct 14.9% of her home expenses.

We also have a spreadsheet that can make these calculations easier.

PRO TIP Make sure you have records of indirect expenses for your home, just like your other expenses.

How do I handle stimulus program funds?

Many home-based child care providers benefited from federal and state stimulus programs in 2022. The funding programs do have different tax implications, so it is helpful to review some of the most common ones.

Stabilization Grants

Many state and local governments used stimulus funding to provide one-time grants to providers, often referred to as “stabilization grants” for personal protective equipment or other needs. Typically, you will receive a Form 1099-NEC displaying the income received. Even if you do not receive a Form 1099-NEC, this revenue should be noted as income for your business (and will be treated as any other source of income). Many business purchases that you made with grant funds will be subject to usual tax deduction guidelines.

Each state administers its own stabilization grant on its own terms and timeline. To find Stabilization Grant Applications for your State or Territory, visit the Child Care Technical Assistance Network.

Additional Subsidy Funding

Many home-based childcare providers received additional subsidy funds (for example, based on pre-COVID enrollment or at a higher rate). This helped to make up for gaps in revenue due to drastic decreases in enrollment. These funds need to be recorded as revenue for your business and are likely already included in a 1099-NEC you received from the Child Care Resource and Referral agency or other entity that paid you.

Great! I am ready to file my taxes. How do I get started?

Decide if you want to file your own taxes for free or if you need a paid tax preparer.

Part II: Filing Your Return Online will help you use MyFreeTaxes to prepare your return for free using online software. This is a great option for people who want to avoid paying tax preparation costs or surprise fees. Head to MyFreeTaxes.com to get started.

However, if your tax situation is especially complicated and you choose to use professional tax preparation services, it is important to find a service that is right for you. Here are some things to consider if you make the choice to pay for tax preparation service.

PRO TIP You can use Google Drive to store your tax return and related documents digitally!

Accelerating Depreciation

Another option in addition to straight line depreciation is to accelerate your depreciation faster which allows you to expense your purchase quicker. Namely, you can accelerate your depreciation through three special rules:

  1. Section 179 depreciation is allowable for physical property used for your business more than 50% of the time. Examples of allowable property are office equipment, furniture, vehicles, and most other assets that are not buildings, or improvements to your building.
    As another example, for a vehicle, such as a van for transporting children, you will need to show that the miles driven for business purposes are at least 50% or of the total miles driven for a year if you are using this method (alternatively, you can depreciate the car based on the percentage of use for business versus personal driving using straight line depreciation).
    For the 2022 tax year, you can write off up to $1.08 million in eligible Section 179 expenses. The one exception is cars that have a limit to a single-year deduction based on weight. For vehicles under 6,000 pounds, it is $11,200.  For vehicles over 6,000 pounds, but less than 14,000 pounds, it is $26,200. You also need to make sure you prorate your costs based on the percentage of business use. For example, if you take the total miles driven in the year for your car and 65% of the miles are for your business, you can only depreciate 65% of the purchase price.

  2. Bonus Depreciation allows you to deduct 100% of certain assets in one year without an upper limit on the total amount you can deduct. To qualify for Bonus Depreciation, the item needs to have a useful life of 20 years or less (so it does not apply to your home) and be used for business 50% or more of the time. This second part is an important one for home-based child care providers since an expense, such as a driveway paving, that meets the criteria of having a useful life of fewer than 20 years may not qualify if the provider's time/space percentage is less than 50%.
    One exception, similar to Section 179 depreciation, is for vehicles. For vehicles under 6,000 pounds, you can expense $19,200. Vehicles over 6,000 pounds, but less than 14,000 pounds, do not have a limit. Just like Section 179 depreciation, you need to use the vehicle for your business at least 50% of the time based on the total miles driven and the amount of depreciation must be adjusted by the business use.
    Bonus depreciation will continue to be 100% through the end of 2022. In the following years, the percentage of depreciation allowed will decrease (starting in 2023 when you will be limited to 80% of value) until it ends completely in December 2026.

  3. The Safe Harbor for Small Taxpayers can provide another way to accelerate depreciation. This rule comes out of the IRS Tangible Property Regulations and allows providers to deduct repairs or improvements to the home (for home-based child care providers) or a facility that are the lessor of $10,000 or 2% of the unadjusted basis (that is the value of the property less the value of the land).
    For example, let’s say you owned a restaurant building that was worth $350,000 and the land is worth $50,000. The unadjusted basis would be $300,000. Two percent of the unadjusted basis would be $6,000. So, an improvement like adding an awning that was $5,500, could be deducted in one year since the cost of the awning was less than $6,000.

For home-based child care providers, you need to also include the time/space calculation. So, let’s say a provider’s home is valued at $400,000 and the land is $65,000. Their unadjusted basis would be $335,000. Further, let’s assume the time/space calculation shows the provider is using the home for business 35% of the time. Now, the unadjusted basis would be $117,250 (that is 35% of $335,000). Two percent of $117,250 is $2,345. So, costs under $2,345 related to repair or renovation could be deducted in one year rather than depreciated over time.

If you use this rule, make sure you include a statement with your tax return reading:

“Section 1.263(a)-3(h) De Minimis Safe Harbor Election 

Your name ___________________________________________________

Your address _________________________________________________

EIN or Social Security Number ________________________________

For the year ending December 31, 20__ I am electing the safe harbor election for small taxpayers under Treas. Reg. Section 1.263(a)-3(h) for the following: (list your improvements).”

It is important to note that state limitations can vary, so depreciation, as described above, may only apply to your federal tax return.

Record Keeping

It is critical to have clear records of your purchases for the depreciation that include what you purchased, when, the total cost, and any indication of the amount of business use (for example was it 100% for business or a mix of business and personal use). It is also important to keep records of your remaining depreciation so that you know to apply it to future years. 

Disclaimer: The information contained here has been prepared by Civitas Strategies and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information are not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited.

How do I depreciate an item?

Once you have identified a depreciable item, you need to determine how you can expense it.
The most basic way to figure out how much you can expense in a given year is called straight line depreciation (though there are some other methods your tax professional may use).
In this calculation, you take the total cost of the item and divide it by the total number of years that the IRS says is the life of the item. Here are some common useful life values from the IRS:

  • Office furniture, fixtures, and equipment - 7 years

  • Automobiles – 5 years

  • Land improvements – 15 years

  • A building (or house) used in part or whole for business – 39 years

You can find the current list of all life values in IRS Publication 946, here.

For example, a land improvement such as a new driveway is considered by the IRS to have a 15-year life. So, if you paid $15,000 for the new driveway, you could deduct $1,000 a year in depreciation for it, for 15 years ($15,000 divided by 15).

Home-Based Child Care Providers

There are two other considerations in determining if an item is subject to depreciation for home-based child care providers. First, if an item is exclusively used for your business (for example, a business computer), 100% of the depreciation can be applied to your business. However, if an item is mixed with personal and business use, like a new cooling system, you will need to determine the amount of business use (and deductible amount) using the time/space calculation.  

Second, home-based child care providers can deduct the depreciation on their homes. Home depreciation is based on the value of the home and any renovations (improvements to the home that increase its value, such as a new deck), but not the value of the land itself. The best way to determine the land value is through your local assessor's office and then subtract that amount from the total value of your home. For example, if you purchased your home for $400,000 and the assessor valued the land at $75,000, then your total depreciable amount would be $325,000.

Pro Tip: Note that when you sell a home where you operated a business, you will need to pay a tax on the depreciation that was allowed or allowable. That means that even if you did not utilize the deduction during the years you operated the business, you will still be liable to factor in allowable depreciation expenses when determining your basis and gain on the sale. This is called depreciation recapture. While a certain amount of the sale of your home will be excluded and not counted as a capital gain, the recaptured depreciation amount will be taxable at a rate of up to 25%. The tax rate will be based on your ordinary tax rate for the given year. Accordingly, it is a good practice to deduct your home when you can to get the benefit of value that will be eventually taxed. More information on this topic can be found in the IRS Q&A.

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