When it comes to classifying the people who work for you, it’s important to know how to properly classify payroll payments. Missing a step can create something of a mess when it comes to reporting this deduction on your tax return. This article offers 7 tips to help daycare owners comply with taxes.

# 1: Two of the most common child care business tax errors are contract work and payroll costs. This occurs when there is confusion between who can and who cannot be included on the payroll as an employee.

# 2: When you hire someone to work for you, either full-time or part-time, you need to know the basics of employer / employee tax law. For example, if you set hours, provide workspace and resources, and have direct control over how work should be done, then you meet the criteria for having an employee.

# 3: There are different tests that will qualify someone as a contractor. They will generally work for you on a project-by-project basis. They also provide their own tools and work on their own schedule. Contractors are also business owners who can also work for more than one client at a time.

# 4: Having people on staff means your company issues a regular payroll. It is important to understand the federal, state, and local payroll reporting requirements. A payroll provider or accountant can help you with payroll setup and reporting.

# 5: When hiring contractors, have each complete a Form W-9 Request for Tax Identification Number and Certification. This will provide you with the information you need when issuing tax documents at the end of the year.

# 6: At the end of the year, provide your employees with an income tax withholding Form W-4. This document summarizes the gross earnings and income taxes that were withheld from each income tax payment. File the information with the IRS, state and local tax authorities, if applicable. For payments you provide to contractors, you will need to issue a Form 1099-Miscellaneous Income. Most payroll companies offer year-end reports to their clients. If you have questions about these documents, consult a tax accountant or payroll provider.

# 7: As an employer, you will have an expense equal to the company’s payroll taxes. Check with your payroll company for the totals you paid during the year and include them when you file your income tax return.

For more information on income tax reporting requirements for employers, see Publication 15, Circular E, Employer Tax Guide here.