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

By Yarik Yarosh, CPA ·September 5, 2026 ·3 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

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.

✓Key takeaway

An assistant who works in the daycare is an employee (not an independent contractor) because the provider controls the schedule, the tasks, the methods, and the work environment. The provider must withhold federal and state income tax, withhold the employee share of FICA (7.65%), pay the employer share of FICA (7.65%), pay FUTA (0.6% on the first $7,000), pay state unemployment tax, and in most states, carry workers’ compensation insurance. A full-time assistant earning $25,000/year costs approximately $27,500-$29,000 including employer payroll taxes and workers’ comp. The assistant’s wages are deductible as a business expense, but for a home daycare, the deduction is applied at 100% (not the time-space percentage) because the assistant works exclusively for the daycare during the hours they are present. The provider’s home expenses (rent, utilities, insurance) continue to use the time-space percentage allocation.

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.

Hypothetical example

Round numbers. A home daycare provider hires a part-time assistant who works 25 hours/week, 50 weeks/year, at $14/hour.

Annual wages: $17,500. Employer FICA (7.65%): $1,339. FUTA (0.6% on first $7,000): $42. State unemployment (estimated 3% on first $7,000): $210. Workers’ comp (childcare classification, approximately $1.50/$100): $263.

Total employer cost: $19,354. Total payroll burden above wages: $1,854 (10.6% on top of wages).

The $19,354 is fully deductible as a business expense. It reduces net profit, which reduces both income tax and SE tax.

If the provider earns $90,000 in gross revenue with expenses (including the assistant) of $50,000: net profit $40,000. The assistant’s cost reduced the provider’s SE tax by approximately $2,734 ($19,354 x 14.13% effective SE rate).

Illustrative numbers only, not a real client and not advice for your facts.

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 $2,600/year in wages for 2024), 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 ($23,500 deferral + 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:

Home daycare with an assistant?

The Business Assessment is a fixed $250. You get a written, CPA-reviewed analysis of the payroll obligations, the deduction for assistant wages, and the retirement plan impact of adding an employee.

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Cite this page

Yarik Yarosh, CPA. "Employee Costs for Daycare Providers: Assistants, Substitutes, and Payroll Tax Obligations." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/childcare-daycare-employee-costs-assistants

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