Effective: February 7, 2022
Your Stuff & Your Permissions
When you use our Services, you provide us with things like your files, content, messages, contacts, and so on ("Your Stuff"). Your Stuff is yours. These Terms don’t give us any rights to Your Stuff except for the limited rights that enable us to offer the Services.
We need your permission to do things like hosting Your Stuff, backing it up, and sharing it when you ask us to. Our Services also provide you with features like eSign, file sharing, email newsletters, appointment setting and more. These and other features may require our systems to access, store, and scan Your Stuff. You give us permission to do those things, and this permission extends to our affiliates and trusted third parties we work with.
Sharing Your Stuff
Our Services let you share Your Stuff with others, so please think carefully about what you share.
You’re responsible for your conduct. Your Stuff and you must comply with applicable laws. Content in the Services may be protected by others’ intellectual property rights. Please don’t copy, upload, download, or share content unless you have the right to do so. We may review your conduct and content for compliance with these Terms. With that said, we have no obligation to do so. We aren’t responsible for the content people post and share via the Services.
Help us keep you informed and Your Stuff protected. Safeguard your password to the Services, and keep your account information current. Don’t share your account credentials or give others access to your account.
You may use our Services only as permitted by applicable law, including export control laws and regulations. Finally, to use our Services, you must be at least 13, or in some cases, even older. If you live in France, Germany, or the Netherlands, you must be at least 16. Please check your local law for the age of digital consent. If you don’t meet these age requirements, you may not use the Services.
Some of our Services allow you to download client software (“Software”) which may update automatically. So long as you comply with these Terms, we give you a limited, nonexclusive, nontransferable, revocable license to use the Software, solely to access the Services. To the extent any component of the Software may be offered under an open source license, we’ll make that license available to you and the provisions of that license may expressly override some of these Terms. Unless the following restrictions are prohibited by law, you agree not to reverse engineer or decompile the Services, attempt to do so, or assist anyone in doing so.
We sometimes release products and features that we are still testing and evaluating. Those Services have been marked beta, preview, early access, or evaluation (or with words or phrases with similar meanings) and may not be as reliable as other non-beta services, so please keep that in mind.
The Services are protected by copyright, trademark, and other US and foreign laws. These Terms don’t grant you any right, title, or interest in the Services, others’ content in the Services, CountingWorks and our trademarks, logos and other brand features. We welcome feedback, but note that we may use comments or suggestions without any obligation to you.
We respect the intellectual property of others and ask that you do too. We respond to notices of alleged copyright infringement if they comply with the law, and such notices should be reported to legal@CountingWorks.com. We reserve the right to delete or disable content alleged to be infringing and terminate accounts of repeat infringers. Our designated agent for notice of alleged copyright infringement on the Services is:
You’re free to stop using our Services at any time. We reserve the right to suspend or terminate your access to the Services with notice to you if:
We won’t provide notice before termination where:
Discontinuation of Services
We may decide to discontinue the Services in response to unforeseen circumstances beyond CountingWorks control or to comply with a legal requirement. If we do so, we’ll give you reasonable prior notice so that you can export Your Stuff from our systems.
Services “AS IS”
We strive to provide great Services, but there are certain things that we can't guarantee. TO THE FULLEST EXTENT PERMITTED BY LAW, CountingWorks AND ITS AFFILIATES, SUPPLIERS AND DISTRIBUTORS MAKE NO WARRANTIES, EITHER EXPRESS OR IMPLIED, ABOUT THE SERVICES. THE SERVICES ARE PROVIDED "AS IS." WE ALSO DISCLAIM ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT. Some places don’t allow the disclaimers in this paragraph, so they may not apply to you.
Limitation of Liability
WE DON’T EXCLUDE OR LIMIT OUR LIABILITY TO YOU WHERE IT WOULD BE ILLEGAL TO DO SO—THIS INCLUDES ANY LIABILITY FOR CountingWorks OR ITS AFFILIATES’ FRAUD OR FRAUDULENT MISREPRESENTATION IN PROVIDING THE SERVICES. IN COUNTRIES WHERE THE FOLLOWING TYPES OF EXCLUSIONS AREN’T ALLOWED, WE'RE RESPONSIBLE TO YOU ONLY FOR LOSSES AND DAMAGES THAT ARE A REASONABLY FORESEEABLE RESULT OF OUR FAILURE TO USE REASONABLE CARE AND SKILL OR OUR BREACH OF OUR CONTRACT WITH YOU. THIS PARAGRAPH DOESN’T AFFECT CONSUMER RIGHTS THAT CAN'T BE WAIVED OR LIMITED BY ANY CONTRACT OR AGREEMENT.
IN COUNTRIES WHERE EXCLUSIONS OR LIMITATIONS OF LIABILITY ARE ALLOWED, CountingWorks, ITS AFFILIATES, SUPPLIERS OR DISTRIBUTORS WON’T BE LIABLE FOR:
THESE EXCLUSIONS OR LIMITATIONS WILL APPLY REGARDLESS OF WHETHER OR NOT CountingWorks OR ANY OF ITS AFFILIATES HAS BEEN WARNED OF THE POSSIBILITY OF SUCH DAMAGES.
IF YOU USE THE SERVICES FOR ANY COMMERCIAL, BUSINESS, OR RE-SALE PURPOSE, CountingWorks, ITS AFFILIATES, SUPPLIERS OR DISTRIBUTORS WILL HAVE NO LIABILITY TO YOU FOR ANY LOSS OF PROFIT, LOSS OF BUSINESS, BUSINESS INTERRUPTION, OR LOSS OF BUSINESS OPPORTUNITY. CountingWorks AND ITS AFFILIATES AREN’T RESPONSIBLE FOR THE CONDUCT, WHETHER ONLINE OR OFFLINE, OF ANY USER OF THE SERVICES.
Let’s Try To Sort Things Out First. We want to address your concerns without needing a formal legal case. Before filing a claim against CountingWorks or our affiliates, you agree to try to resolve the dispute informally by contacting legal@CountingWorks.com. We’ll try to resolve the dispute informally by contacting you via email.
Judicial forum for disputes. You and CountingWorks agree that any judicial proceeding to resolve claims relating to these Terms or the Services will be brought in the federal or state courts of Orange County, California, subject to the mandatory arbitration provisions below. Both you and CountingWorks consent to venue and personal jurisdiction in such courts. If you reside in a country (for example, European Union member states) with laws that give consumers the right to bring disputes in their local courts, this paragraph doesn’t affect those requirements.
IF YOU’RE A U.S. RESIDENT, YOU ALSO AGREE TO THE FOLLOWING MANDATORY ARBITRATION PROVISIONS:
These Terms will be governed by California law except for its conflicts of laws principles. However, some countries (including those in the European Union) have laws that require agreements to be governed by the local laws of the consumer's country. This paragraph doesn’t override those laws.
These Terms constitute the entire agreement between you and CountingWorks with respect to the subject matter of these Terms, and supersede and replace any other prior or contemporaneous agreements, or terms and conditions applicable to the subject matter of these Terms. These Terms create no third party beneficiary rights.
Waiver, Severability & Assignment
CountingWorks failure to enforce a provision is not a waiver of its right to do so later. If a provision is found unenforceable, the remaining provisions of the Terms will remain in full effect and an enforceable term will be substituted reflecting our intent as closely as possible. You may not assign any of your rights under these Terms, and any such attempt will be void. CountingWorks may assign its rights to any of its affiliates or subsidiaries, or to any successor in interest of any business associated with the Services.
We may revise these Terms from time to time to better reflect:
If an update affects your use of the Services or your legal rights as a user of our Services, we’ll notify you prior to the update's effective date by sending an email to the email address associated with your account or via an in-product notification. These updated terms will be effective no less than 30 days from when we notify you.
If you don’t agree to the updates we make, please cancel your account before they become effective. By continuing to use or access the Services after the updates come into effect, you agree to be bound by the revised Terms.
Effective: February 7, 2022
Thanks for visiting our website. Our mission is to create a web based experience that makes it easier for us to work together. Here we describe how we collect, use, and handle your personal information when you use our websites, software, and services (“Services”).
What & Why
We collect and use the following information to provide, improve, and protect our Services:
Account information. We collect, and associate with your account, the information you provide to us when you do things such as sign up for your account, opt-in to our client newsletter or request an appointment (like your name, email address, phone number, and physical address). Some of our Services let you access your accounts and your information via other service providers.
Your Stuff. Our Services are designed to make it simple for you to store your files, documents, comments, messages, and so on (“Your Stuff”), collaborate with others, and work across multiple devices. To make that possible, we store, process, and transmit Your Stuff as well as information related to it. This related information includes your profile information that makes it easier to collaborate and share Your Stuff with others, as well as things like the size of the file, the time it was uploaded, collaborators, and usage activity. Our Services provide you with different options for sharing Your Stuff.
Contacts. You may choose to give us access to your contacts (spouse or other company staff) to make it easy for you to do things like share and collaborate on Your Stuff, send messages, and invite others to use the Services. If you do, we’ll store those contacts on our servers for you to use.
Usage information. We collect information related to how you use the Services, including actions you take in your account (like sharing, viewing, and moving files or folders). We use this information to improve our Services, develop new services and features, and protect our users.
Cookies and other technologies. We use technologies like cookies to provide, improve, protect, and promote our Services. For example, cookies help us with things like remembering your username for your next visit, understanding how you are interacting with our Services, and improving them based on that information. You can set your browser to not accept cookies, but this may limit your ability to use the Services.
Marketing. We give users the option to use some of our Services free of charge. These free Services are made possible by the fact that some users upgrade to one of our paid Services. If you register for our free Services, we will, from time to time, send you information about the firm or tax and accounting tips when permissible. Users who receive these marketing materials can opt out at any time. If you do not want to receive marketing materials from us, simply click the ‘unsubscribe’ link in any email.
We sometimes contact people who do not have an account. For recipients in the EU, we or a third party will obtain consent before contacting you. If you receive an email and no longer wish to be contacted by us, you can unsubscribe and remove yourself from our contact list via the message itself.
Bases for processing your data. We collect and use the personal data described above in order to provide you with the Services in a reliable and secure manner. We also collect and use personal data for our legitimate business needs. To the extent we process your personal data for other purposes, we ask for your consent in advance or require that our partners obtain such consent.
We may share information as discussed below, but we won’t sell it to advertisers or other third parties.
Other users. Our Services display information like your name, profile picture, device, and email address to other users in places like your user profile and sharing notifications. You can also share Your Stuff with other users if you choose. When you register your account with an email address on a domain owned by your employer or organization, we may help collaborators and administrators find you and your team by making some of your basic information—like your name, team name, profile picture, and email address—visible to other users on the same domain. This helps you sync up with teams you can join and helps other users share files and folders with you. Certain features let you make additional information available to others.
Team Admins. If you are a user of a team, your administrator may have the ability to access and control your team account. Please refer to your organization’s internal policies if you have questions about this. If you are not a team user but interact with a team user (by, for example, joining a shared folder or accessing stuff shared by that user), members of that organization may be able to view the name, email address, profile picture, and IP address that was associated with your account at the time of that interaction.
Law & Order and the Public Interest. We may disclose your information to third parties if we determine that such disclosure is reasonably necessary to: (a) comply with any applicable law, regulation, legal process, or appropriate government request; (b) protect any person from death or serious bodily injury; (c) prevent fraud or abuse of our platform or our users; (d) protect our rights, property, safety, or interest; or (e) perform a task carried out in the public interest.
Stewardship of your data is critical to us and a responsibility that we embrace. We believe that your data should receive the same legal protections regardless of whether it’s stored on our Services or on your home computer’s hard drive. We’ll abide by Government Request Policies when receiving, scrutinizing, and responding to government requests (including national security requests) for your data:
Security. We have a team dedicated to keeping your information secure and testing for vulnerabilities. We also continue to work on features to keep your information safe in addition to things like blocking repeated login attempts, encryption of files at rest, and alerts when new devices and apps are linked to your account. We deploy automated technologies to detect abusive behavior and content that may harm our Services, you, or other users.
User Controls. You can access, amend, download, and delete your personal information by logging into your account.
Retention. When you sign up for an account with us, we’ll retain information you store on our Services for as long as your account is in existence or as long as we need it to provide you the Services. If you delete your account, we will initiate deletion of this information after 30 days. But please note: (1) there might be some latency in deleting this information from our servers and back-up storage; and (2) we may retain this information if necessary to comply with our legal obligations, resolve disputes, or enforce our agreements.
Around the world. To provide you with the Services, we may store, process, and transmit information in the United States and locations around the world—including those outside your country. Information may also be stored locally on the devices you use to access the Services.
EU-U.S. Privacy Shield and Swiss-U.S. Privacy Shield. When transferring data from the European Union, the European Economic Area, and Switzerland, We rely upon a variety of legal mechanisms, including contracts with our customers and affiliates. We comply with the EU-U.S. and Swiss–U.S. Privacy Shield Frameworks as set forth by the U.S. Department of Commerce regarding the collection, use, and retention of personal information transferred from the European Union, the European Economic Area, and Switzerland to the United States.
We are subject to oversight by the U.S. Federal Trade Commission. JAMS is the US-based independent organization responsible for reviewing and resolving complaints about our Privacy Shield compliance—free of charge to you. We ask that you first submit any such complaints directly to us via privacy@CountingWorks.com. If you aren’t satisfied with our response, please contact JAMS at https://www.jamsadr.com/eu-us-privacy-shield. In the event your concern still isn’t addressed by JAMS, you may be entitled to a binding arbitration under Privacy Shield and its principles.
If we are involved in a reorganization, merger, acquisition, or sale of our assets, your information may be transferred as part of that deal.
Your Right to Control and Access Your Information
You have control over your personal information and how it is collected, used, and shared. For example, you have a right to:
Your personal information is controlled by CountingWorks, Inc. Have questions or concerns about CountingWorks, our Services, and privacy? Contact our Data Protection Officer at privacy@CountingWorks.com. If they can’t answer your question, you have the right to contact your local data protection supervisory authority.
Third Party Vendors
Amazon Web Services
Updated: June 2020.
strives to ensure that its services are accessible to people with disabilities. has invested a significant amount of resources to help ensure that its website is made easier to use and more accessible for people with disabilities, with the strong belief that every person has the right to live with dignity, equality, comfort and independence.
makes available the UserWay Website Accessibility Widget that is powered by a dedicated accessibility server. The software allows us to improve its compliance with the Web Content Accessibility Guidelines (WCAG 2.1).
Enabling the Accessibility Menu
The accessibility menu can be enabled either by hitting the tab key when the page first loads or by clicking the accessibility menu icon that appears on the corner of the page. After triggering the accessibility menu, please wait a moment for the accessibility menu to load in its entirety.
continues its efforts to constantly improve the accessibility of its site and services in the belief that it is our collective moral obligation to allow seamless, accessible and unhindered use also for those of us with disabilities.
In an ongoing effort to continually improve and remediate accessibility issues, we also regularly scan with UserWay's Accessibility Scanner to identify and fix every possible accessibility barrier on our site. Despite our efforts to make all pages and content on fully accessible, some content may not have yet been fully adapted to the strictest accessibility standards. This may be a result of not having found or identified the most appropriate technological solution.
Here For You
If you are experiencing difficulty with any content on or require assistance with any part of our site, please contact us during normal business hours as detailed below and we will be happy to assist.
If you wish to report an accessibility issue, have any questions or need assistance, please contact customer support.
We keep you up-to-date on the latest tax changes and news in the industry.
Simplified Food Deduction
Special Rules for Business Use of the Provider’s Home
Home Sale Consequences
Other Daycare Provider Issues
Daycare User Credit
Employer Dependent Care Benefits
Other Credit Criteria
Special tax benefits are available for those providing daycare services for children and the parents who pay for those services. This article looks at the various tax deductions daycare providers may use and the childcare tax credit that the parents may claim.
Daycare providers are generally self-employed individuals who provide care in their home, and like other self-employed individuals conducting a business, they are allowed to deduct business expenses, including the following:
Business Use of a Vehicle – Examples of business-related use of a personal vehicle by a daycare provider include taking the kids to the park, on field trips, or to the movies. Also eligible is mileage to purchase supplies and for other business-related travel. What’s deductible is the standard mileage rate (58.5 cents per business mile in 2022, up from 56 cents per mile in 2021) or the prorated business portion of the actual operating expenses for the vehicle. In either case, a contemporaneously prepared log detailing the business trips should be maintained.
Food – Daycare providers can deduct the cost of meals provided to the children (not including meals for their own children). Using a simplified method for the deduction does not require documenting food purchases. This does not preclude a care provider from using the actual expenses if the actual cost is higher and the provider is willing to document the expenses without including food purchased for his or her own family’s use. The simplified meal deduction amounts for 2021 are illustrated in the table below.
The rates do not include the cost of nonfood supplies (e.g., utensils), which may be deducted separately. The number of meals per day per child is limited to the amounts below. (The table uses the amounts based upon the rates for contiguous states and will be higher for Alaska and Hawaii.)
2021 Daily Maximum Per Child
If the provider receives some form of reimbursement or subsidy, then the provider may deduct only the part of the simplified rate that exceeds the reimbursed amount
Business Use of the Home – Self-employed individuals may take a business deduction for the business use of a portion of their home if that portion is used exclusively for business. Daycare facilities are not subject to the exclusive use requirement that applies to other home offices. However, that special rule only applies to providers who:
1. Are licensed, certified, registered or approved as a daycare care provider under state law;
2. Have a pending application for licensing, certification, registration, or approval under state law as a daycare provider that has not been denied; or
3. Is exempt from licensing, certification, registration, or approval under state law.
Any daycare provider not meeting one of these three requirements is still subject to the exclusive use rules, which will generally prevent them from claiming the deduction unless they use some portion of the home exclusively for daycare purposes, such as a bedroom or a storage area. The daycare facility exception does not apply if the services performed are primarily educational or instructional in nature (e.g., musical instruction). However, the exception does apply if the services are primarily custodial and if the educational, development, or enrichment activities are only incidental to the custodial services. The services must be provided for individuals aged 65 or older, children, or individuals who are physically or mentally incapable of caring for themselves.
When calculating the percentage of business use of the home, both the space used to operate the daycare business and the amount of time that the space is used to provide day care, including preparation and cleaning time, are factors.
Example – Edna uses her living room, kitchen, and bathroom ten hours a day, five days a week to provide licensed daycare services. The home is 2,400 square feet, and the living room, kitchen and bathroom are a combined 1,400 square feet. The exclusive use requirement doesn’t apply. Edna’s percentage use of her home for business is determined as follows:
Once the percentage is determined, all the home expenses, including interest, real property taxes, home insurance, maintenance, utilities, and depreciation, are summed up and multiplied by the percentage to determine the deduction for the business use of the home. If the home is rented, the rent expense replaces the interest, taxes, and depreciation. After determining the deduction, it is further limited to the gross income from the daycare operation, and if limited by the gross income, there is a specific order in which the home expenses can be used (not discussed in this article).
Claiming the business use of the home deduction will also impact any future sale of the home. For taxpayers who own and use their home for two years out of the five years prior to the sale, they can generally exclude up to $250,000 ($500,000 if married filing jointly) of any resulting gain. However, any depreciation claimed or that could have been claimed after May 15, 1997, cannot be excluded and, as a result, will be taxable to the extent of any gain from the sale.
Example: A care provider is entitled to claim $1,000 per year of home depreciation, and she operates that business for ten years, claiming a total of $10,000 in depreciation. Whenever she ultimately sells her home, the $10,000 cannot be included in the excluded gain and will always be treated as a taxable capital gain, to the extent of any home sale gain.
Other Expenses – Other expenses include just about any expense that has to do with operating the daycare facility, including, for example:
o Business banking account fees
o Daycare licensing
o Daycare organization membership expenses
o Seminars and education related to operating a daycare center
o Business insurance
o Games and toys
o Supplies, diapers, wipes, and cleaning supplies
o Phone service
o Prorated Internet service
o Field trip expenses
o Payroll for employees
Additional important tax issues apply to daycare providers:
Self-Employment Tax – Like all self-employed taxpayers, daycare providers must pay self-employment tax, which is made up of the Social Security tax of 12.4% on the first $147,000 (2022) of profit from the business and a 2.9% Medicare tax on all the profits. Plus, there is an additional 0.9% Medicare tax on the extent to which the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. In addition, half of the self-employment tax can be deducted from gross income.
Qualified Business Income Deduction - Most business owners are allowed a deduction equal to 20% of their qualified business income (QBI). This deduction is most commonly known as the pass-through income deduction because it applies to income from business pass-through entities such as partnerships and S-corporations but also includes income from sole proprietorships reporting on Schedule C of Form 1040. It is sometimes referred to as the Section 199A deduction. The computation can be quite complicated and includes limitations on the deduction at the entity level and then again when the deductions from all entities of the taxpayer are combined and is further subject to a limitation based on the taxpayer’s taxable income. While the deduction doesn’t reduce the amount of the business income on which self-employment tax is paid, it does lower the individual’s income that is subject to income tax. In many cases, this deduction can be very beneficial for a taxpayer operating a daycare business.
Retirement Plan Contributions – Profits from a daycare business qualify for IRA contributions and self-employed retirement plans, allowing daycare providers to put away substantial amounts for their future retirement.
Medical Insurance Above-the-Line Deduction – While most taxpayers must itemize their deductions in order to deduct the cost of their medical insurance, self-employed taxpayers – including daycare providers, to the extent of the profits from their business – can deduct the premiums from their adjusted gross income and avoid the 10% medical expense haircut when itemizing deductions.
Employer Identification Number – Most daycare clients can claim a tax credit for the cost of daycare. However, to do so, they must include either the daycare provider’s Social Security number (SSN) or an employer identification number (EIN) on their tax returns. It is a best practice in this age of ID theft for an individual operating a daycare business not to give out their SSN to their clients and instead obtain and use an EIN (even if they don’t have employees).
If you use the services of daycare providers you may qualify for a tax credit if the expense is an “employment-related” expense, i.e., it must enable you or your spouse, if married, to work or look for work, and it must be for the care of a child, stepchild, foster child, brother, sister, or stepsibling (or a descendant of any of these) who is under 13, lives in your home for more than half the year, and does not provide more than half of his or her own support for the year. Married couples must file jointly, and both spouses must work (or one spouse must be a full-time student or disabled) to claim the credit.
The age restriction does not apply if the individual is disabled (isn't physically or mentally able to care for him- or herself) and qualifies as your dependent. There are some situations when a disabled individual may qualify even if not your dependent; check with this office for details.
The child for whom you paid the care expenses must be your dependent. So, for example, if you are divorced and your ex-spouse claims your child who lives with your former spouse as a dependent, you may not claim the childcare credit even if you pay some or all of the childcare expenses. On the other hand, under a special rule for divorced or separated parents, if you are the custodial parent, even if you cannot claim the child as a dependent, you would be eligible to claim the credit for the qualified childcare expenses you paid.
The qualifying expenses are limited to your income from working and, if you are married, the expenses are limited to the lower of your or your spouse’s income from working. However, under certain conditions, when one spouse has no actual income from working and that spouse is a full-time student or disabled, that spouse is considered to have a monthly income of $250 (if the couple has one qualifying child) or $500 (for two or more qualifying children). This means the income limitation is essentially removed for a spouse who is a student or disabled all year.
The qualifying expenses can’t exceed $3,000 per year if you have only one qualifying child, while the limit increases to $6,000 per year if you have two or more qualifying persons. (These amounts were substantially higher for 2021, but Congress has not extended the pandemic relief provisions that lead them to enhance the credit for 2021. The 2021 expenses are capped at $8,000 for one and $16,000 for two or more qualifying individuals.)
If there are two children, the care expenses need not be divided equally. For example, if you paid $2,500 in qualified expenses for the care of one child and $3,500 for the care of another child, the $6,000 can be used to determine the credit. The credit is computed as a percentage of qualifying expenses – in most cases, 20%. See the table below for the credit percentages based on the taxpayer’s adjusted gross income.
For 2021 only, the credit rate for most filers was 50% of the expenses. Thus, the maximum credit was $4,000 for one qualifying child and $8,000 for two or more children (or other qualifying individuals). This increase in the credit was targeted at lower-income taxpayers, so it includes a phaseout provision whereby the 50% credit rate begins to phase out when the taxpayer’s AGI reaches $125,000 (one percentage point for each $2,000 above the $125,000 threshold), but the rate isn’t reduced below 20% until the AGI reaches $400,000, at which point the credit phaseout picks up again.
AGI Adjusted Applicable Percentage (for other than 2021)
Example: Al and Janice both work, with combined earned income more than $50,000 for the year. Janice has a part-time job, from which she earns $10,000 for the year. Her work hours coincide with the school hours of their 11-year-old daughter, Susan, so while school is in session, Al and Janice incur no childcare expenses for Susan. However, during the summer vacation period, they place Susan in a day camp program that costs $4,000. Since the expense limitation for one child is $3,000, their childcare credit would be $600 (20% of $3,000).
The credit will reduce your tax bill dollar for dollar. Thus, in the above example, Al and Janice would pay $600 less in taxes by virtue of the credit. However, the credit can only offset income tax and alternative minimum tax liability, and any excess is not refundable. The credit cannot be used to reduce self-employment tax, if you are self-employed, or a myriad of other taxes. Generally, the childcare credit is nonrefundable. However, for 2021, it is fully refundable if the taxpayer’s primary residence (or at least one spouse on a joint return) is in the U.S. for more than half the year.
Employer Dependent Care Benefits – Some employers provide dependent care assistance programs to help their employees with the cost of daycare. Payments under these plans used by employees to pay dependent care expenses are excludable from employees’ income, up to the lower of:
The employee’s earned income (for married employees, this is the earned income of the lower-paid spouse) or
$5,000 ($2,500 for married filing separate). (For 2021 only, these amounts were increased to $5,250 for married separate and $10,500 for other filing statuses.)
Because reimbursement up to these limits is excludable from income, the benefits the employee receives are treated as reimbursement for daycare expenses that reduce the expense limits of $3,000 for one child and $6,000 for two or more children. Reimbursement more than these limits is taxable to the employee and does not reduce qualified expenses for the credit.
Other Credit Criteria:
Age of the Child – If the qualifying child turns 13 during the year, only the care expenses paid for the child for the part of the year when he or she was under age 13 qualify.
Day Camps – Many working parents must arrange for care for their children under 13 years of age (or any age if disabled) during school vacation periods. A popular solution — with a tax benefit — is a day camp program. The cost of day camp can count as an expense toward the child and dependent care credit. But expenses for overnight camps do not qualify. Also, not eligible are expenses paid for summer school or tutoring programs.
Both Parents Working in an Unincorporated Business – When both spouses of a married couple are jointly involved in an unincorporated business, it is common, but incorrect, for all that business’s income to be reported as just one spouse’s income. As a result, they lose the benefits of the childcare credit, which requires both spouses to have income from working. However, here are a couple of ways to remedy this situation.
o One option is to file a partnership return for the activity, in which case each spouse will receive a K-1 that reports his or her share of the net profit.
o Another approach avoids the necessity of filing a partnership return and is probably less complicated. This is done by making a qualified joint-venture election, in which each spouse elects to file a separate Schedule C for his or her respective share of the business. This gives each spouse self-employment income for the purposes of the self-employment tax and for claiming the childcare credit.
A qualified joint venture refers to any joint venture involving the conduct of a trade or business if:
(1) The only members of the joint venture are spouses,
(2) Both spouses materially participate in the trade or business, and
(3) Both spouses elect to apply this rule.
Generally, to meet the material participation requirement, each spouse will have to participate in the activity for 500 hours or more during the tax year.
However, a business owned and operated by spouses through a limited liability company (LLC) does not qualify for the qualified joint venture election.
School Expenses – Only school expenses for a child below the kindergarten level are considered qualifying expenses for this credit.
In-Home Care Providers – If the daycare is provided in a taxpayer’s home, the daycare provider is considered a household employee. If you are a household employer, you may have to withhold and pay Social Security and Medicare tax as well as pay federal unemployment tax and issue the caregiver a W-2 form. However, if the caregiver provides the services in his or her home, the caregiver would not be considered your household employee.
Records Required – To claim the credit on your tax return, you will need to provide the care provider’s name, address, and tax ID number. No credit is allowed without that information. If you have more than one child who qualifies you for the childcare credit, you must also show the expenses paid for each child, up to the $6,000 total maximum allowance. If your state allows a childcare credit, additional information, such as the care provider’s phone number, may be required.
This has been an overview of the various tax issues related to daycare from the perspectives of both the provider and the recipient of daycare services. However, as in everything taxes, many more rules and issues exist than could be included in this article. So, for information about how your state deals with the issue and questions about how the daycare will impact your taxes, please give this office a call.
Each month, we will send you a roundup of our latest blog content covering the tax and accounting tips & insights you need to know.