How to Start a Home Daycare: Licensing, Setup and Taxes

A home daycare, which most states call a family child care home, is one of the few businesses you can open in your own living room. It is also one of the most regulated. Before you take in children from other families, almost every state wants the home licensed or registered, the adults who live there background checked and the caregiver trained. The business side comes on top of that: a company to run it through, a tax number parents will ask for, insurance that actually covers paid care, and a contract that says what families pay and when.

This guide walks through the order that works for most providers. Rules differ a lot from state to state, so treat the examples below as a picture of how it works and confirm every requirement with your own state's child care licensing office before you enroll the first child.

Licensing comes first, and it is set by your state

There is no federal child care license. Each state decides when a home needs one, who issues it and what it takes. The usual trigger is caring for children from more than one family who are not related to you, often above a set number of children. Most states then have two or three home categories, from a small registered home to a larger group home with an assistant, and each comes with its own limits on how many children you can care for at once.

Two examples show how much the details vary:

• Texas. Child Care Regulation, part of the Health and Human Services Commission, issues the permits. A registered child care home is run in the caregiver's own home, with no more than 12 children in care at the same time, the caregiver's own children included. The primary caregiver must be at least 21 with a high school diploma or the equivalent, and the state asks for proof of insurance before it issues the permit.
• Florida. The Department of Children and Families requires a home that cares for children from more than one unrelated family to be registered or licensed. In most counties yearly registration is enough, but counties with their own licensing ordinance, Miami-Dade, Broward, Hillsborough and Palm Beach among them, require a license instead. Before registering, the operator completes a 30-hour family day care home course and a 5-hour early literacy course, as the DCF registration page explains.

Your state's agency may be the health department, the human services department or an early learning office. Searching your state name plus "family child care home license" usually finds it, and most agencies run an orientation session for new applicants that is worth attending before you buy anything.

Background checks cover the whole household

A home daycare differs from a center in one important way: the children are in a house where other people live. States therefore screen more than the provider. Florida, for example, requires a Level 2 background screening through its Care Provider Background Screening Clearinghouse for owners, employees and substitutes, and counts household members over the age of 12 as well, with those under 18 screened for delinquency records rather than fingerprinted. Expect fingerprints for the adults, a check of the state's child abuse registry and a repeat on a schedule. Plan for anyone who moves in later, too: a new adult in the home usually has to be screened before they can be there during care hours.

Your home, your landlord and your insurer

Three people other than the state get a say in whether a daycare can run from your house. The city or county decides whether its zoning allows a child care business in a residential area, and some require a home occupation permit. A landlord or a homeowners association can forbid it in the lease or the covenants, so read those documents before you apply. And your insurer needs to know.

Insurance is where new providers most often get caught. Consumer guides from the National Association of Insurance Commissioners and the Insurance Information Institute note that homeowners policies commonly exclude business activity, and paid home day care is a standard example. A child hurt in your home while you are being paid to watch them may not be covered at all. The fix is either a home day care endorsement on your homeowners policy or a separate child care liability policy, and several states require proof of coverage before they license you. Not telling the insurer about a substantial home business can also lead to a denied claim or a policy that is not renewed.

Why providers form an LLC

You can run a home daycare as a sole proprietor, under your own name. Many providers start that way. Forming an LLC adds a separate company between the business and your household, which matters more in child care than in most work from home: the business makes promises to parents, collects tuition and carries the risk of an injury, while the house itself is often your family's main asset.

With an LLC, the parent agreements, the business bank account, the supply accounts and the insurance policy are all in the company's name. Kept separate, with its own account and no mixing of family and business money, the company is the party that contracts with families. Two limits are worth being clear about. An LLC does not replace the child care license, which is issued for the home and the caregiver and still names you. And it does not shield you from a claim over your own care of a child; that is what the insurance is for. The comparison is laid out in LLC vs sole proprietorship.

A provider who owns the business alone has a single-member LLC, which by default is taxed just like a sole proprietorship, so the profit still lands on your own return. How that works, and what changes with a spouse as co-owner, is in single-member LLC. The filing steps themselves are in how to start an LLC.

How to start a home daycare, step by step

1. Read your state's family child care rules. Find the agency, the home categories it offers and the limits for each. Decide how many children, of what ages, you want to care for, because that decides which category you apply for and whether you need an assistant.
2. Check zoning, your lease or HOA and your insurer. A rejected zoning request or an HOA objection after you have bought cribs and a fence is an expensive surprise. Call your insurer at the same time and ask what a home day care endorsement or separate policy would take.
3. Form the LLC. File the articles of organization in your state. The application asks for the company name, a registered agent and the organizer. Choose a name you are happy for parents to see on receipts and on the state's records.
4. Get the company's EIN. The next section explains why a daycare needs its EIN early.
5. Apply for the license or registration. Expect an application, the background screening for everyone the state counts, training hours, first aid and CPR in most states, immunization or health records, a fire and safety review of the home and an inspection. Ask whether the application can list the LLC as the business while you remain the licensed caregiver.
6. Buy child care liability insurance. Put the company on the policy as the named insured or an additional insured, so the business and you are both covered for the care you provide.
7. Set up the bank account, contracts and food program. Tuition goes into the company's account, never your personal one. A written parent agreement covers hours, rates, late pickup, sick policy, holidays and notice to leave.

The EIN step for a home daycare

Parents are the reason a daycare needs its tax number sooner than most small businesses. Working parents who pay for care can claim the federal child and dependent care credit, and to claim it they report your business on Form 2441. The Form 2441 instructions ask for the care provider's name, address and identifying number: a Social Security number for an individual, and an EIN otherwise. Parents usually collect it with Form W-10, the dependent care provider's identification form, and the W-10 itself warns that a provider who does not give a correct number is subject to a penalty.

That means every family you enroll will ask for your number each January. Without an EIN, the only number you can give is your own Social Security number, handed out on paper to every family that has ever used your care. With the LLC's EIN on the W-10, your SSN stays private and the number matches the company named on your receipts. Parents who lose track of it later often go looking for a provider's number themselves, which is why a daycare EIN lookup is such a common search each tax season.

The EIN is also what the bank asks for when you open the business account, what a CACFP sponsor asks for on its application, and what you will need the day you hire an assistant, since payroll and the state employer accounts run on it.

The food program and other money matters

The Child and Adult Care Food Program, run by the US Department of Agriculture through state agencies, reimburses licensed providers for nutritious meals and snacks served to children in care. A family child care home does not apply to the state directly: it joins through a sponsoring organization, which trains providers, visits the home, checks the menus and records, and passes the reimbursement on. Your licensing office or state child nutrition agency can point you to sponsors in your area.

Two tax points are worth raising with a tax preparer before your first year ends. Home daycare providers get a special rule for the home office deduction: IRS Publication 587 allows the business use of the home for day care without the usual exclusive use test, provided you meet your state's licensing requirements. And how you take money out of the business depends on how the LLC is taxed, which is covered in how to pay yourself from an LLC.

After you open

Keep the license current, with renewals, ongoing training hours and inspections on the state's schedule. File the LLC's annual report with the state on time, and keep a registered agent in place. Hand out W-10s or year-end statements to families in January. The checklist of what to set up in the first months after the LLC is approved is in what to do after forming an LLC.

What the LLC itself costs in the largest states

The state charges a fee to form the LLC and, in most states, a recurring fee to keep it active. These are separate from your child care license fees and the cost of insurance. Here is what the ten most populous states charge.