Conversations questioning whether or not providers should apply for the lastest stabilization grant are going on. Members of the PLC have done research of federal/national resources, and reviewed other states’ approaches. FCCAM PLC is not offering any financial or legal expertise with this post. While FCCAM supports providers applying for this latest stabilization grant, it is up to each provider to make the best decision for their personal position and their small business’ sustainability.
Grants and loans are income for tax purposes, but unlike a loan you do not have to pay a grant back. A comment repeatedly heard in discussions has been in regards to providers not wanting to pay additional taxes. If you take this grant you would be paying additional taxes on the income from the grant, but at the same time you would be walking away with more money than you had without the grant.
A common figure used for estimating what the extra tax basis would be is 30% – 40%. As self-employed, you have to pay 15% Social Security/Medicare tax; any state tax; and then the federal tax (following the current year tax brackets) on all income, including any grant money. If you are looking for an estimate of what to take off the top, look at 30-40% tax on the grant money.
Thinking of the grant as extra income, not extra taxes, here’s an example:
Provider licensed for 8, needing their full-time equivalent (FTE) to be at 5 to meet their annual business budget.
“Full-time equivalent(FTE)” is a financial term. For child care it means filling up a care slot. It’s not licensed capacity. It’s how your care slots are filled. We all know we are licensed for a certain number, but we often have more than that enrolled in the program. That’s because if we are doing part-time or before-after school care we are juggling children to fill each care slot as full as possible so we are maxing out the potential income.
Do you turn away children when full-time equivalent is reached? For most the answer would be “No”. Extra income is made from those additional children in care, even minus the 30% paid in taxes. That extra income can be used for such things as a new car, kids travel teams, college tuition, home renovations, and retirement.
In researching, there were only 2 examples provided where the grant might have a negative impact. One is if your health insurance cost is figured off your income. Any increase in income could cause you to have higher insurance costs that would outweigh the financial gain. The other is if your income is used in applying for financial scholarship relief for a child in college or preparing to attend college, or even yourself if you are in a degree program. In either of these situations you should contact the party that oversees them for more information.
Sole provider / licensed for 8 / no subsidy / Quality for ME Step 1
- capacity: $800
- staff: $200
- subsidy: $0
- Step 1: $50
Monthly total: $1050
*Payments of this grant which start Oct. 2021 are expected to last a year ending in Sept. 2022. Income received is thus split over 2 tax years: 3 months for 2021 and 9 months 2022.
- Oct/Nov/Dec 2021: $3150 / 30% is $945 / income gained $2205
- Jan thru Sept 2022: $9450 / 30% is $2835 / income gained $6615
From 8/3/21 OCFS memo: Grant funds are meant to cover COVID-related costs for the following:
- Rent, utilities, facilities maintenance, and insurance
- Reduction in family cost (i.e. registration fees, weekly child care cost for private pay parents)
- Personal protective equipment (PPE), cleaning, and other health and safety needs
- Equipment and supplies
- Goods and services
- Mental health services
- Paying for past expenses
- Additional administrative expenses due to COIVD-19
- COVID-19 testing and contact tracing
- Additional food cost due to COVID-19; and/or
- To prevent hardship due to closings in response to positive cases of COVID within programs or decreased enrollment
- Hazard pay or bonuses to staff.
- Staff support can include but not limited to staff sign-on bonuses, current staff bonuses, increased wages, hazard pay or back pay from March 11, 2021 on.
- Grant funds may be used to support staff not eligible for the individual grant staff bonuses.
For the staff bonus you need to be sure your employees meet the federal definition: Employees are defined as individuals for whom you withhold and pay any federal and state payroll taxes. Independent contractors or anyone you provide a 1099 Form to are not considered employees.
Here’s a Family Child Care Expense Tracking Tool which might help providers estimate their total of their program’s monthly expenses that the Maine application is asking for.
If you have a wish list of items for future purchase, using grant money is an option. From the research, other states are allowing providers to take the full grant as income for themselves. It is not clear if this will be allowable in Maine. Most providers’ annual business expenses are already covered by collected parent fees. With receipts the grant amount can be used to cover your normal annual business deductions and parent fees would now be your income/profit. It’s all the same total money, just assigned different roles/purposes. Funding a retirement account with the grant may also be allowable. If you have debt for such things as medical expenses, or credit cards, paying those off might be better usage of funds. Paying off accounts like this (with accruing interest) you realize more return on that extra income in the long run. Then you might consider just setting extra income aside for that. All indications are that major renovations are not allowable as a usage for this money. Our situations are all unique and thus how we decide to proceed in usage of the extra income from this stabilization grant will vary
For a number of the business expenses fcc providers can write off as deductions the Time-Space % must be used. Consider that to cover or pay $0 in taxes on $3000 of the grant (at 30% tax) you would need to have deduction receipts that total $10,000. That means an additional extra $10,000 in receipts. Using the scenario of $3450 extra income for 2021, after just paying the 30%( $1035) for taxes you’re ahead $2415 for 2021 if you take the grant.
Many providers do not take all the deductions they are legally able to. Tom Copeland has some strong thoughts on this and has written many posts about taxes and deductions. Check out his posts.
Having some basic knowledge of tax brackets and how they work might help answer additional questions.
Your total income is not what you pay taxes on. Your taxable income is determined by finding your adjusted gross income and then subtracting either the standard deduction or itemized deductions. Here are the 2021 standard deductions amounts for each filing status:
|Filing Status||Standard Deduction|
|Married Filing Jointly or Qualifying Widow(er)||$25,100|
|Married Filing Separately||$12,550|
|Head of Household||$18,800|
The IRS requires receipts for items that are claimed as deductions to be maintained for 3 years. States may have another standard. If you have staff you need to keep those payment records for 4 years. 7 years is only required if you claim a loss or bad debt as a deduction.
The tax you owe is figured by adding the amount for each of the brackets your income falls under. If you fall into 3 different tax brackets, you pay at those 3 different rates. It is a common misunderstanding that all of your taxable income is taxed at the highest rate. You would add them all up to find your total income tax owed. If you make just enough to fall into a higher tax bracket only the amount you made just over a bracket will be taxed higher. Check your copy of your federal and state tax returns for the last couple of years. You can see if your income and business expenses are aligning or if there is a major change in either. You can estimate what the grant income might do.
You can find charts for all the 2021 tax brackets here.
Here’s how it would work for Married filing jointly:
|$0 – $19,900||10%|
|$19,901 – $81,050||$1,990 + 12% of the amount over $19,900|
|$81,051 – $172,750||$9,328 + 22% of the amount over $81,050|
|$172,751 – $329,850||$29,502 + 24% of the amount over $172,750|
|$172,751 – $329,850||$67,206 + 32% of the amount over $329,850|
|$418,851 – $628,300||$95,686 + 35% of the amount over $418,850|
|$628,301 or more||$168,993.50 + 37% of the amount over $628,300|
For providers that are thinking about lowering their costs for parents for the year or not raising rates as planned, 2 points to consider:
1 – It’s good business practice to keep your rates at least at the market rate for your county or raise your posted rate yearly considering the annual inflation rate. You do not have to charge families your posted rate. You can apply discounts per family as desired. Annual update of rates helps eliminate big rate changes.
2 – If you decide to reduce costs for families this year, you will not show an increase in your income and thus no taxes will be paid on grant money received. What will the impact be on your rates after this grant has ended?