Retirement Plans for Daycare Providers: Solo 401(k) for Home Daycare, Safe Harbor for Centers
Daycare providers are not SSTBs under IRC 199A. The QBI deduction is available at all income levels, without phase-out. Retirement plan contributions reduce taxable income (and therefore income tax and self-employment tax), but they do not reduce QBI (which is calculated before the deduction). Even so, the tax savings from a retirement plan are significant for daycare providers, and the Solo 401(k) in particular can shelter a large portion of net income.
A home daycare provider with no employees (other than a spouse) can use the Solo 401(k): $23,500 employee deferral (2025) plus 25% of net self-employment income as an employer contribution, up to $70,000 combined. Net self-employment income for home daycare providers is already reduced by the time-space percentage deduction and the food program deduction, so the employer contribution base is lower than gross revenue suggests. A daycare provider grossing $70,000 with net profit of $35,000 (after time-space and food deductions) can contribute approximately $31,600 to a Solo 401(k): $23,500 deferral + $8,100 employer contribution (25% of the SE-adjusted income). Once the provider hires an assistant (a W-2 employee, which daycare assistants almost always are), the Solo 401(k) is unavailable and the provider must use a SIMPLE IRA or Safe Harbor 401(k). Daycare centers with multiple teachers and aides face the same employee-cost challenge as other small businesses with lower-paid staff.
How does the Solo 401(k) work for home daycare?
When does an assistant eliminate the Solo 401(k)?
A daycare assistant who works in the provider’s home is almost always a W-2 employee. The provider controls the assistant’s schedule, tasks, and methods. The assistant uses the provider’s space, supplies, and curriculum. Every factor in the behavioral, financial, and relationship tests points toward employee status.
Once the provider has one W-2 employee (even part-time), the Solo 401(k) is unavailable. The provider must choose between:
SIMPLE IRA: Employee deferrals up to $16,000 (2025). Mandatory employer match of dollar-for-dollar up to 3% of compensation, or 2% non-elective contribution. Lower deferral limit than the Solo 401(k), but the employer cost for one part-time assistant is modest.
SEP IRA: Employer contributions only (no employee deferral). The same percentage must be contributed for all eligible employees. If the provider contributes 25% for themselves, the assistant receives 25% too. For a part-time assistant earning $15,000, that is $3,750, which may be acceptable.
What about daycare centers with multiple employees?
A daycare center with 5-10 teachers and aides faces the full small-business retirement plan challenge. The Safe Harbor 401(k) with a 1-year eligibility requirement is the most common choice: it allows the owner to defer $23,500 while the employer cost (3% non-elective on eligible employees) is manageable because childcare worker turnover is moderate and many part-time aides do not reach the 1,000-hour threshold in their first year.
Related guides:
- Childcare Daycare Employee Costs Assistants
- Childcare Daycare Entity Structure Scorp
- Childcare Daycare Estimated Taxes
- Childcare Daycare Food Program Deduction
- Childcare Daycare Licensing Deductions
The Business Assessment is a fixed $250. You get a written, CPA-reviewed retirement plan comparison that accounts for the time-space deduction, the food deduction, and any assistant or employee costs.
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Yarik Yarosh, CPA. "Retirement Plans for Daycare Providers: Solo 401(k) for Home Daycare, Safe Harbor for Centers." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/childcare-daycare-retirement-plans
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.