18 Jun Tax advice for unreported income
Q. My husband has a regular job and I run a small day care out of our house. I earn about $10,000 a year from this, but we’ve never included it as income. I know we should. What do we do?
A. We’re glad you asked. Tax reporting isn’t the only issue you need to consider for a business like yours.
The first issue is whether your day care needs to be licensed with the state of New Jersey, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.
“In New Jersey, childcare centers that provide care for six or more children under the age of 13 are required by state law to be licensed, while family child care homes providing care for five or fewer children under the age of 13 are not required to be licensed by the state,” Maye said.
In addition, he suggests you consider the potential liability you are taking on by running a day care business out of your home.
“It is highly unlikely your homeowner’s policy provides liability coverage for your business,” Maye said. “I would recommend you look into obtaining liability insurance coverage to protect you in the event a child is accidentally injured while under your care.”
Finally, Maye said, you should begin to keep the necessary books and records to properly report the income from your home-based child care business.
When running a business, you would report any gross income received but you can also deduct any direct expenses of running the business, as well as some indirect expenses such as home-related expenses. he said.
“In terms of past underreporting of income, I would suggest you see a qualified CPA to assess your situation in more detail,” Maye said. “The IRS does have a voluntary disclosure program where the IRS can forbear criminal prosecution for taxpayers who come forward to admit previously unreported tax liabilities.”
If going the IRS voluntary disclosure route, make sure to have a qualified CPA and attorney on your team, he said.
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This story was first posted in June 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.