Employee Costs for Daycare Providers: Assistants, Substitutes, and Payroll Tax Obligations

Many home daycare providers hire an assistant, a substitute, or a helper once their enrollment reaches the point where one adult cannot meet the required staff-to-child ratios. Adding an employee changes the tax picture: the provider must withhold and pay payroll taxes, may need workers’ compensation insurance, and loses access to the Solo 401(k) retirement plan. The assistant’s wages are deductible, but the deduction is limited by the time-space percentage for home daycare.

Is the assistant an employee or a contractor?

The assistant is an employee. The provider:

• Sets the assistant’s schedule (arrives at 7:30am, leaves at 5:30pm)
• Directs the work (feed the children at noon, supervise outdoor play from 2-3, lead art activities)
• Provides the workplace and all supplies
• Sets the pay rate
• The assistant cannot subcontract or send a replacement without the provider’s approval

There is no realistic argument for independent contractor status for a daycare assistant working in the provider’s home.

What about substitute caregivers?

A substitute who fills in for the provider on sick days or vacation days is also an employee if they follow the provider’s instructions, use the provider’s space and supplies, and work the provider’s schedule. The substitute’s wages are deductible, and the same payroll tax obligations apply.

If the substitute works only a few days per year (under $2,700/year in wages for 2026), the provider may be exempt from withholding under the household employee rules. But for daycare, the standard employer-employee rules typically apply because the substitute is working in a business context, not a household context. The provider should consult with a payroll service to determine the correct filing category.

What about the Solo 401(k)?

A provider with even one employee (other than a spouse) loses eligibility for the Solo 401(k). The provider must switch to a SEP IRA (equal percentage for all) or a Safe Harbor 401(k)/SIMPLE IRA if they want to offer a retirement plan that covers the employee.

This is a meaningful trade-off: the Solo 401(k) allows higher contributions ($24,500 deferral for 2026, plus employer contribution) than the SEP at lower income levels. Once the assistant is hired, the provider’s retirement plan options become more expensive or more limited.

Related guides:

• Childcare Daycare Entity Structure Scorp
• Childcare Daycare Estimated Taxes
• Childcare Daycare Food Program Deduction
• Childcare Daycare Licensing Deductions
• Childcare Daycare Retirement Plans

What are the most important tax deadlines for small business owners?

The federal income tax return deadline depends on your entity type. Sole proprietors (Schedule C) and single-member LLCs file with Form 1040 by April 15. S-Corps (Form 1120-S) and partnerships (Form 1065) file by March 15, which is earlier because they issue K-1s that individual partners need for their personal returns. C-Corps (Form 1120) file by April 15. All deadlines shift to the next business day if they fall on a weekend or holiday. Extensions are available (6 months for most entities, 5 months for partnerships and S-Corps), but an extension to file is not an extension to pay. Estimated taxes are due quarterly on April 15, June 15, September 15, and January 15.

Related guides:

• Daycare Center Worker Classification: Why Teachers and Aides Are Almost Always Employees

• Hiring Your First Employee: Tax Obligations, Payroll Setup, and the Solo 401(k) Impact

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.