If you’re nervous about the IRS and how that will affect your preschool business, this will demystify everything about preschool taxes! Preschool and IRS don’t seem like they should be used in the same sentence, but taxes are a necessary part of doing business and this post will help you sort them out.
DISCLAIMER: The numbers used in this post are just examples and are not actual numbers. There are many more business expenses that could be deducted from your taxable income and there could be additional sources of income for your preschool also. This blog post is not to be construed as tax advice or financial advice. You are highly encouraged to consult a tax attorney and/or an accountant for professional advice. Registering your business as an LLC is highly recommended because of the legal benefits to doing so.
1. UNDERSTAND BUSINESS TAXES
When you start working for an employer you fill out a form W-4 that tells your employer how much in taxes to deduct from your paycheck each payday, with a business it works a little differently. When you own a business, you have income and expenses. Your total income for the year is called your gross income. Then at tax time you add up all your business expenses and subtract those expenses from your gross income. The amount leftover is called your net income, and this is the amount your business pays taxes on.
What Is Business Income?
Business income covers any funds that come into your business. For example:
| Tuition | $36,000.00 |
| Registration Fees | $1,500.00 |
| Raffle Income | $1,500.00 |
| Summer Camp Fees | $3,750.00 |
| TOTAL | $42,750.00 Gross Income |
What Is A Business Expense?
A business expense is anything that you bought or pay for that you use in your business. Here are some examples:
| Curriculum | $500.00 |
| Domain Name | $15.00 |
| Preschool All Stars Membership ($67×12) | $804.00 |
| Cleaning Supplies | $97.00 |
| Website Hosting ($97×12) | $1,164.00 |
| Field Trips | $268.00 |
| Teacher’s Wages | $11,250.00 |
| TOTAL | $14,098.00 Business Expenses |
$42,750.00 Gross Income
– $14,098.00 Business Expenses
$28,652.00 Taxable Income
2. DETERMINE HOW YOU’RE TAXED
If your business were a registered corporation, your business taxes and your personal taxes would be completely separate, but as an LLC you are considered a sole proprietor for tax purposes. So what does that mean?
What that means is all your business income and expenses would be calculated on a Schedule C, and your personal income taxes would be calculated on a Form 1040. Your Schedule C profit or loss would then be added or subtracted into your total personal income for the year. And after calculating any
- Personal deductions (mortgage interest, medical expenses, charitable giving, etc.)
- And credits you qualify for (earned income credit, education credits, personal childcare credits, etc.)
- Your adjusted gross income (Total income from all sources: wages, business, unemployment, etc.)
- Is the amount that your taxes will be calculated on.
The amount of tax you pay, or have refunded to you, depends on how much money you made from all sources before you paid any taxes, and the amount of taxes you have already had deducted throughout the year.
3. HIRE A CPA TO DO YOUR TAXES
Even though you think you might save money doing it yourself, you’ll likely pay more in taxes (because you missed vital deductions and tax loopholes that CPAs know but you don’t) than the cost of hiring a CPA. So do a Google search and find a CPA that has high reviews on their Google listing, and use them. They will tell you all the paperwork they need.
If you have QuickBooks reports, you can give those to them, or you can simply give them a copy of your yearly Profit/Loss Statement (that you worked on in the previous step). You will want to reach out to them in February of any tax year to get into their system to do your prior year’s tax return. The costs for a CPA to do your taxes should be about $350+ for a personal return and $600+ for a business return.
4. SAVE MONEY FOR TAXES
For the first year of your business, you won’t need to make estimated tax payments to the IRS, as you don’t know how much profit you will make. Just set aside 22% of your NET income (i.e. your income after expenses have been deducted) in your business savings account that is “ear-marked” for taxes. You will likely only have to pay about 10% in taxes (because your small business will be eligible for lots of tax credits, especially if you have children and also use the child tax credits) but it’s always better to have MORE and keep the excess, than to be short at tax time.
And remember, you’ll only pay taxes on your net income. So each month, see how much you made (after expenses) and set aside 20% of that into your savings account. Of course, if you take a loss for several months, then you only need to set aside 20% of net income whenever you start making a profit.
5. REALIZE YOUR RISK OF BEING AUDITED IS LOW
According to Kiplinger, your risk of being audited by the IRS is only 0.8%-1.6% when your business makes up to $25,000 in gross annual revenue. The risk increases slightly once your business hits $100,000 in gross annual revenue. That’s why it’s important to hire a CPA: they will ensure your risk of getting audited is low because they do things “by the book.”
6. REDUCE YOUR TAX LIABILITY WITH ADDITIONAL TAX DEDUCTIONS
If you use a portion of your home for your preschool (i.e. 20% of the square footage is used for the preschool, even if you also use that portion of your home for daily use as well) then you could also deduct (at tax time) a percentage (i.e. 20%) of your mortgage, utility payments, and property taxes. Similarly, you can track your car mileage and deduct any mileage used for preschool purposes (like going to the bank, field trips, library, etc.)
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