Congrats! You're on your way to becoming a business owner! Owning a business is exciting and rewarding, but it also comes with its own challenges.
Wonderschool’s goal is to make the business stuff easier so you can concentrate on caring for children. However, you do need to understand some basic facts about being a business owner.
When you are an employee, your employer will usually offer benefits including health insurance (and possibly other insurances like dental, life, disability, etc.).
All health care plans have a monthly fee called a “premium.” When your employer offers health insurance benefits, they cover part of this cost. The amount that employers cover varies from 50-100% (the national average is about 80%). So, keep in mind that even as an employee, you are usually contributing to the cost of your health care every month. These costs are automatically deducted from your paycheck.
When you are self-employed, you are responsible for securing your own insurance. Under the Affordable Care Act, all individuals in the U.S. are required to have health insurance through the end of 2018 – you can be fined if you don’t. This requirement is ending in January 2019.
If your spouse has insurance through their employer, it’s usually the best option to enroll in a family plan that covers both of you. This will raise your spouse’s premium, but it’s typically less expensive than purchasing your own plan.
Luckily, if that option is not available to you, purchasing an individual health insurance plan is not difficult. You can purchase a plan through healthcare.gov and you may qualify for a reduced cost plan depending on your household income. You can see a quick estimate of monthly costs in just a few minutes at https://www.healthcare.gov/see-plans/
You can also purchase insurance directly from health care providers such as Unitedhealth, Kaiser, Aetna, Humana, Cigna, etc.
Revenue, expenses, and income
Let’s discuss a few financial terms that will become familiar to you as a business owner:
Revenue: This is the total amount of money that you receive from families for any kind of payment – tuition, drop-in, enrollment fees, etc.
Expenses: This is all the money you spend to operate your business, including assistant teachers’ salary/wages, food, materials, etc. If you have an in-home program, a portion of your rent or mortgage can also count as an expense. You might also hear these referred to as “tax-deductible expenses.” (P.S. did you know that Wonderschool’s fee is a tax-deductible expense?)
Taxable income: This is your revenue minus your expenses.
Here’s an example of how this all works together: let say that last month, all the families in your program paid you a total of $8,000 for care provided – this is your revenue. But, you spent $3,000 to pay your assistant teacher, buy food for snacks, and get some new materials – these are your expenses. That means you will only pay taxes on $5,000 of your earnings that month – this is your taxable income.
The most important thing to know here is that you should save receipts for EVERYTHING you purchase for your business. Keeping track of your expenses can save you literally thousands of dollars every year.
Below is a list of some items that are tax-deductible expenses for family child care.
- Assistant teacher salary / wage
- Materials / toys
- Cleaning supplies
- Professional dues
- Office expenses
- Car expenses (if you provide transportation for the children)
- Mortgage, property taxes, and homeowner’s insurance*
*A portion of these items count as tax-deductible expenses based on how much of your home is used for care and how many hours per day.
Wonderschool has tools to help you keep track of your expenses and revenue, but we recommend that you keep all your receipts and work with a tax professional – they can help you maximize your deductions and save more money. Also, every provider has a different situation when it comes to taxes based on your individual household's situation, earnings, etc. You may want to do some Googling to see if there are tax professionals in your area who are familiar with family child care.
When you are employed by another business, your employer automatically deducts taxes from your paycheck.
As a self-employed individual, you are responsible for reporting your income and paying taxes. Make sure to set aside some of your income every month to pay your taxes. It’s hard to know exactly how much you will owe, but general wisdom is to save 25-30% of your taxable income. This is a ballpark number, so talk to a tax professional to be sure.
The amount that remains after you pay taxes is called your net income. This is the amount of money you take home at the end of the day!
The tax above is estimated at 25% of the taxable income. Like we mentioned before, your tax rate may be different.
Keep in mind that self-employed individuals usually pay their taxes 4 times per year (quarterly). You can face a fine if you pay in one lump sum in April. A tax professional can help you set up quarterly payments.
As your program grows, you may want to bring on an assistant teacher. There are a couple of items to keep in mind when thinking about hiring.
First, when you hire an assistant teacher, they are your employee. You are responsible for paying them as well as any applicable payroll taxes. Luckily, there are great online tools (our favorite is Gusto) that can help you manage payroll easily and affordably.
As an employer, you can decide whether you would like to offer benefits (such as health insurance) to your employees. Typically for small businesses with fewer than 5 employees, you are not required to offer health insurance for your employees – however, this varies by state. Most child care providers do not currently offer health insurance to their employees, but like we said, the choice is up to you.