While many childcare centers open up a separate place of business outside of their home, there are more than one million childcare providers who elect to offer services in their own homes to take care of children so long as they do so in accordance with their state laws. If they pursue this route, they can be considered to be independent contractors or self employed as opposed to full-scale businesses.
Childcare centers that hire employees must obtain an EIN, or employer identification number. Individuals operating their childcare business out of their homes and do not have employees are not obligated to get a separate tax ID, they can use their Social Security number. With that being said, there are numerous benefits to obtaining one for both the present day and when considering the future of their business.
Benefit #1: You Proactively Plan for the Future
You may have started your business as a one-person operation, but word of mouth about your services is very good. Your name has been shared, recommending your stellar services. As a result, your business is beginning to grow – with more and more parents wanting to entrust the care of their children to you.
However, you cannot do this alone, you now need to hire employees. The problem is, regardless of the state you live in, you are not able to hire additional childcare workers unless you have an EIN. Obtaining an EIN when you open your business is good proactive planning.
Consider the fact your business may grow and someday you might have employees. This way, if your business does expand, and you find you need to hire one or more workers down the road, you will already be prepared and not have to experience delays or turn away new families who want to hire your services to watch their children.
Benefit #2: Identity Theft Protection
Identity theft is a massive problem plaguing society. According to the Identity Theft Resource Center, 422,143,312 people were victims of data breaches in 2022.
Furthermore, the number of women who provide childcare services far exceeds the number of men. Statistics indicate that the daycare owner gender ratio is females, 95.6%, and males, 4.4%. This is significant.
Historically, the Bureau of Justice Statistics indicated in 2016 that women are more often victims of identity theft than men. Since every parent who entrusts their child to daycare will want to claim the federal childcare tax credit, this means they will be asking you for your tax ID number. Plus, to get paid and pay taxes yourself, you will need to supply a tax ID anyway.
Considering you might run your daycare for years and have numerous families rotate through, that is an awful lot of parents to give your Social Security number to if you do not have an EIN, heightening your risk for identity theft. Obtaining an EIN significantly increases your privacy, while reducing the chances of you becoming an identity theft victim.
Benefit #3: Separates Individual and Business Finances
Having an EIN greatly helps to separate your individual and professional finances. This makes it easier to track income, pay bills, and do other financial tasks without blurring the lines between your finances. It also helps with avoiding mistakes when filing your taxes.
Additionally, if you are like millions of other small businesses in the US, you might decide to register your childcare business as an LLC. As an LLC you will need to have a clear separation of your individual and business finances. This also gains you access of the protections of an LLC structure versus a Sole Proprietor.
Benefit #4: A Childcare Provider EIN Boosts Professionalism/Credibility
Many people successfully provide childcare services as solo caretakers. While you can supply your Social Security number to parents, this looks less professional. By giving them an EIN instead, you can elevate the perception of your business’s professionalism and may lend more credibility to parents seeking to hire a reputable childcare provider.
Benefit #5: You Can Open a Business Bank Account and Improve the Way You Handle Finances
Simplifying the process by separating your personal and business financial transactions helps keep your accounting clean and lowers the chance of being audited by the IRS. Having your EIN goes a long way toward preventing accounting errors or accidentally misrepresenting income, deductions, and other information to the IRS, which can lead to a costly and time-consuming audit.
Most banks or other financial institutions will require you to have an EIN before allowing you to open a business bank account. While you may theoretically be able to use your Social Security number or your personal bank account, this is not advisable. It is highly beneficial in the long run to differentiate between your personal and business transactions. This way, if you are audited or otherwise need to demonstrate business expenses, you have a clear separation.
Benefit #6: Helps Set Up Business Profiles to Collect Payments
In today’s busy world, many people prefer to make payments electronically. Those who are juggling full-time jobs and parenting responsibilities often prefer to simplify tasks to keep on top of day-to-day activities.
Chances are you will have parents who want to pay you via a payment app, such as PayPal or Venmo. You may or may not be aware that the IRS requires these platforms to report total payment volumes if a business grosses at least $20,000 per year and 200 payments that same year (especially important if you’re paid weekly and take care of more than one family’s child). This triggers them to send the IRS a 1099-K.
Additionally, some states dictate lower earning thresholds or the number of transactions for reporting. Having an EIN means you can provide payment platforms with your EIN instead of your SSN. Not to mention, it helps facilitate the reporting process if you have an EIN instead.