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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29497
Experience:  Taxes, Immigration, Labor Relations
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Im considering opening a day care in my house. For tax purposes,

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I'm considering opening a day care in my house. For tax purposes, using the time*space method, I would be using 36% of my home for day care. If I watch 8 kids at $215/week each, that would be $7454 per month gross. If I subtract day care insurance ($84/month), house rental (36% of $2975/month), house utilities (36% of $300/month), TV/Internet/Phone (36% of $135/month), and house rental insurance (36% of $200/month), it looks like my gross income would be $6070 per month. Is that right? If so, it seems like I would also need to deduct 25% for Federal taxes, 15.3% for self-employment tax, and 8% for state tax (Maryland), which leaves me only $3414/month. Am I missing any tax means of making more money each month?

Thanks so much!

Lev :

Hi and welcome to our site!
In general - your estimations are correct.
Following you might want to consider...
You are correct that indirect expenses related to your house are prorated. However - it is likely that you will have direct expenses related to your daycare business. Such expenses are fully deductible.
In additional - a half of self-employment tax is deducted against your income tax liability.
You might use your car for your business - in this case - transportation expenses are deducted. It might be more simple to use the standard mileage method to track your car expenses.

Lev :

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 56.5 cents per mile for business miles driven.
You might hire other persons to help you - these will be additional expenses.
You might need professional services - for instance - you could hire a tax accountant to prepare your tax return. For instance - if you pay for our service - that might be your deductible business expense.
You will use your computer for business purposes - and the cost will be deducted according to business use.
You will purchase some supply, toys, office supply, etc - that will be additional costs.

Lev :

You estimated 25% for Federal taxes - but most likely - that will be your marginal tax rate. Part of your income will be taxed in lower tax brackets. The IRS published tax tabled here - http://www.irs.gov/pub/irs-pdf/i1040tt.pdf
and you may review Tax Rate Schedules on the last page.
Similarly - Maryland's personal income tax rates vary - see for instance here - http://www.bankrate.com/finance/taxes/state-taxes-maryland.aspx
So your actual federal and state income tax liability might be a little less than you estimated.

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