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), but they do not reduce self-employment tax or QBI (both are calculated before the retirement plan 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): $24,500 employee deferral (2026) plus an employer contribution of up to 20% of net self-employment income (the effective self-employed rate, because the contribution reduces the income base it is calculated on), up to $72,000 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 $31,000 to a Solo 401(k): $24,500 deferral + $6,500 employer contribution (20% 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 $17,000 (2026), or $18,100 (2026) for an employer with 25 or fewer employees. 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 $24,500 (2026) 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
What are the retirement deadlines for a home daycare provider?
A home daycare provider with no employees and an existing Solo 401(k) must elect deferrals by December 31, then can deposit them, plus the employer contribution, by the return due date with extensions. For 2025 that’s October 15, 2026 if you file Form 4868. If you’re the only one working in the business and never opened a plan, you can still adopt one after year-end and make 2025 deferrals by April 15, 2026.
Hiring an assistant changes the calendar. A SIMPLE IRA has to take effect by October 1 of the year you start it. Your assistant’s deferrals must reach the plan as soon as they can reasonably be separated from your money, and no later than 30 days after the end of the month they came out of the paycheck. Your match is due by the return due date with extensions.
A SEP for a provider with one assistant is more forgiving: it can be set up and funded as late as that same extended date.
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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, updated September 23, 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.