Sole proprietor, Inc, LLC, - What does it all Mean?
Your childcare is a business. While you may not need to formally create a legal business, there are options to consider if you have an especially large operation, or employ more than one person. From a legal standpoint, different types of entities provide limited liability. This is something you would want to discuss with a lawyer.
Different entities also provide different tax advantages and disadvantages. The type
of entity really depends on the business and how many people own the business.
An accountant should be able to advise you on the best entity for your situation.
What can you deduct on your taxes? Any why would you want to?
Each time you claim something as a deduction on your taxes, you reduce the
amount of money the government can tax. By reducing that amount, you can
reduce how much tax you pay, letting you keep more of your money.
A simple rule of thumb to remember is any ordinary and necessary business
expense is deductible. Keep in close contact with your accountant, and find one if
you don’t have one. Regular meetings or discussions with the accountant will help
in working through what is considered ordinary and necessary for your business. Be
sure to keep in mind all the expenses you incur when doing business - ie., don't
forget things such as mileage on your vehicle. Trips to the bank to deposit your
weekly daycare income, for instance, is an ordinary and necessary business expense
that is deductible.
Who has time to file receipts after a day with the kids?
Even though resting from your busy day sounds better than filing you receipts for
groceries that week, stay on top of your paperwork and make sure you keep records
of all the money you spend on your business. From the IRS point of view, the more
records and documents to substantiate your position, the better. Invoices, receipts,
credit card statements, bank statements and cancelled checks are all good evidence
of the expenditures incurred. There are also several accounting programs –
available at any store that sells computer software - that are inexpensive and work
great for tracking expenses and providing useful financial reports. Several online
companies sell software specifically for childcare providers.
Be sure to set up a filing system for your records. It doesn’t need to be fancy, as
long as it makes sense to you and you can find your records once tax time comes
around.
Keep work and personal expenses separate
Having a separate checking and savings account for your business will make
keeping track of your finances a lot easier. Sure, you have to balance another
checkbook, but you’ll know that all money in and out of those accounts has to do
with your business. Also, consider getting separate credit cards for the business.
When you use all of these accounts exclusively for business, it is much easier to put
all your records together, rather than trying to separate out what is business and
what is personal.
Ahh, taxes. Where do we start?
Tax laws are so specific to your state and city, that it’s hard to give even general
guidelines. You may want to check with a local accountant or state and local tax
authority to find out if there are any special rules, permits or taxes that you may
need to run your business. Paying your taxes quarterly might be an option, so you
can spread the payment out over the year instead of paying it all at one time.
Melissa Newby is the cofounder of http://www.daycarematch.com
Bob Sawicki is a CPA practicing Tax and Financial Planning in Madison WI. He can be
reached at sawicki@tds.net
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