Many family child care providers are confronted with an unwelcome tax bill when filing their annual income tax return. Daycare business profits can ratchet your taxes up quickly, because you're paying both income tax and self-employment tax. Self-employment tax covers your contributions to social security and Medicare and comes to 14.13% of your profit. (See my Family Child Care Tax Return Overview handout for more information regarding how your income is taxed.) Your income tax rate will vary and will be higher if your spouse has some significant wages or other taxable income. On the other hand, married providers often have the advantage of tax withholding through their spouse's paycheck, which sometimes covers the family's entire tax bill.
Most child care providers with a profitable business need to make estimated tax payments of anywhere from a few hundred to several thousand dollars every quarter (4 times per year). As a self-employed person myself, I know how hard it is to write those checks! But if you don't make quarterly payments, you may soon find yourself in a vicious cycle of owing.....owing the taxes and owing penalties.
The cycle of owing is not hard to get started. If you let even one year go by with making estimated tax payments, you can arrive at tax time with a large tax balance due. At the same time, in order to catch up, you must start making the current year estimated tax payments. Guess when the first estimated tax payment is due? Also on April 15!
I often work with clients who cannot afford to pay off last year's taxes and make their current year estimated tax payments. In such cases, I urge the client to make the estimated taxes their first priority and work on paying the back taxes off over time.
Paying back taxes over time will generate penalties and interest, but skipping your estimated tax payments will also result in penalties. Being dutiful about making your quarterly estimated tax payments is the only way to get current and eventually eliminate penalties entirely. Otherwise, you can easily find yourself with a large tax bill every April and it becomes a vicious cycle.
So make your first estimated tax payment this April 15! If you cannot pay off the back taxes within six months (while staying current on this year's quarterly payments), you could request an IRS installment agreement and pay off the federal balance due through manageable monthly payments.
If it's past April 15, make a payment now. Until your tax return is filed, it's never too late to start.
If you're wondering how much to pay and you were in business last year, look at how much tax you paid and use that as a guide. Otherwise, Tom Copeland suggests paying 20% of your gross business income (parent fees plus Food Program income) in his Taking Care of Business blog article. If you have a professional prepare your tax return, ask them to calculate estimated tax payments for the coming year, too.
Last updated 14 May 2013