Tax treatment of day carers

Childminders are subject to certain regulations regarding their income. Childminders are generally self-employed. Remuneration paid not only by private organisations but also by the public sector (e.g. state, local authority, youth welfare office) for the care of children is included in income subject to income tax. This applies regardless of the number of children cared for.

However, whether a tax burden actually arises in individual cases depends on whether the total annual income exceeds the tax-free allowances (see also When and how much tax is due?).

In the following, we would like to explain the most important tax conditions and answer the most frequently asked questions.

What do I need to bear in mind when I first contact the tax office at the start of my new job?

As you are taking up freelance work as a day carer, you must notify the tax office in whose district you live within one month. This written notification can be made informally. You must then complete the "Questionnaire for tax registration for sole proprietorships" form and submit it electronically to your local tax office.

You can find the tax registration questionnaire and further information on submission at www.elster.de.

In the questionnaire itself, you must provide information on your personal and business circumstances. The questions concern, among other things, the type of activity carried out and the date on which the business was opened. You will also be asked about your other income and that of your spouse, if applicable. Please complete the questionnaire carefully so that the tax office can draw the appropriate tax conclusions. Based on this information, the tax office will then issue you with a tax number and check, for example, whether and to what extent advance income tax payments need to be made.

Further detailed information on the first contact with the tax office, types of tax and tax returns as well as payment transactions with the tax office can be found in the tax guide for start-ups published by the Hessian Ministry of Finance.

The Hessian Ministry for Social Affairs and Integration has also published a flyer "Become a childminder", which shows you, among other things, how to get in touch with interested families, how many children you are allowed to look after or how you can qualify.

Do I have to register a business and pay business tax?

No. Child day care does not constitute a trade as defined by § 6 of the Trade, Commerce and Industry Regulation Act. It is therefore not necessary to register a business. There is also no trade tax to be paid because child day care is a freelance activity.

What do I need to consider with regard to VAT?

The services provided by carers in child day care are exempt from VAT in accordance with Section 4 No. 25 of the German VAT Act if the carer has a child day care licence in accordance with Section 43 of Book Eight of the German Social Code (SGB VIII). If the carer does not have a permit in accordance with Section 43 SGB VIII (e.g. because they work in the household of the legal guardian), the turnover is also tax-exempt if their suitability has been determined by the youth welfare organisation. The exemption also applies if a licence in accordance with Section 45 SGB VIII (licence for the operation of a facility in which children or young people are looked after or receive accommodation for the whole or part of the day) exists.

What has to be taxed for income tax purposes?

You only have to pay tax on the profit calculated on the basis of a comparison of business assets or as the difference between the operating income received and the operating expenses incurred (surplus income statement). The profit must be stated in your income tax return. Details on this can be found in the tax guide for start-ups (points B.2.3.3 and B.2.3.4), which is published by the Hessian Ministry of Finance.

What all counts as business income?

In principle, operating income includes all funds that day carers receive from private sources (e.g. parental contribution) or public sources (e.g. state, local authority, represented by youth welfare organisations, youth welfare office) for their childcare activities. If there is no tax exemption, all operating income is also taxable.

According to these principles, the funds from the promotion of child day care in accordance with § 32a of the Hessian Child and Youth Welfare Code (HKJGB), for example, also constitute taxable business income.

In contrast, reimbursements made by the public youth welfare organisation for contributions to accident insurance, reimbursements for appropriate old-age provision and for appropriate health and long-term care insurance in accordance with Section 23 (2) sentence 1 numbers 3 and 4 SGB VIII are tax-free in accordance with Section 3 no. 9 EStG and therefore do not increase profits. The investment grants under the "Childcare funding" investment programmes are also tax-free (see also "What are the investment grants for?").

What is the investment grants all about?

Since 1 August 2013, children are legally entitled to a place in a daycare centre or childminder from the age of one until the age of three.

Funding is provided as part of the "Childcare funding" investment programme for necessary investments that serve to create new or maintain existing childcare facilities for children up to school age. In addition to construction measures and equipment projects in day care centres, renovation measures and equipment investments in day care centres are also eligible for funding.

In the years 2019 to 2024, the state of Hesse will also grant subsidies for investments to expand and maintain a needs-based infrastructure for the education, upbringing and care of children up to school age in daycare centres and childminders on the basis of the Federal Financial Aid Act for the Expansion of Daycare for Children.

These subsidies, which are granted to day carers on the basis of the Act on Federal Financial Aid for the Expansion of Day Care for Children, are exempt from income tax according to a decision by the supreme federal and state tax authorities and therefore do not count as taxable business income.

However, expenses directly related to these tax-free subsidies may not be deducted as business expenses.

You can find more information on the current investment programmes for childcare (funding opportunities, application procedures, etc.) on the website of the Kassel Regional Council.

Childcare funding 2021-2023 - RP Kassel

Childcare funding 2020-2024 - RP Kassel

Does the payment of rent subsidies or subsidised rental lead to operating income?

The direct rent subsidies that you receive from third parties for renting childcare rooms are taxable business income.

However, if childcare rooms are provided at a reduced rate (e.g. by local authorities), no notional business income is recognised in the amount of the difference between the standard local rent and the rent actually paid. If childcare is provided free of charge as a self-employed activity, the lump sum for operating expenses cannot be deducted.

What all counts as business expenses?

Operating expenses include all expenses that are incurred as a result of the care activity. However, contributions paid by the childminder to old-age insurance, accident insurance and appropriate health and long-term care insurance are not business expenses.

A childminder's operating expenses include, for example, the following activity-related expenses for

• Food for the children, equipment (furniture), activity materials, specialised literature, hygiene articles,
• rent and operating costs for the premises used for childcare,
• communication costs,
• training costs,
• Insurance contributions, insofar as they are directly related to the activity,
• travelling expenses,
• Leisure activities with the children,
• Purchase of protective masks for own business activities *).

*) A detailed treatise on tax regulations and relief in the Corona crisis can be found in the FAO "Corona" (taxes) of the Federal Ministry of Finance.

If the operating expenses are directly related to tax-free income, a tax-reducing deduction is not possible as part of the profit determination (see also question 5).

Further details can be found in the tax guide for start-ups (points B.2.3.7 to B.2.3.12), which is published by the Hessian Ministry of Finance.

There is also a special feature: day carers can claim operating expenses either by itemising the actual expenses paid or in the form of a lump sum if they determine their profits by means of a revenue surplus calculation.

The lump sum for operating expenses for daycare can still be deducted if the daycare provider no longer receives any payments due to the coronavirus pandemic when the daycare centre closes. In cases where day carers receive compensation payments in accordance with Section 56 (1) to (3) IfSG (compensation for loss of earnings) and Section 56 (4) IfSG (payments for uncovered operating expenses), the flat-rate operating expenses allowance and actual operating expenses are not to be reduced in accordance with Section 3c (1) EStG.

What is the advantage of the flat-rate business expense allowance?

Lump sums simplify the tax return and avoid the cumbersome listing of individual expenses and the collection of receipts. Day carers can claim the flat-rate business expenses allowance for children in care and, if applicable, the flat-rate business expenses allowance for free places instead of the actual expenses.

What are the conditions for deducting the flat-rate operating expenses?

You can either claim the flat-rate operating expenses or deduct the actual operating expenses. An additional deduction of actual operating expenses in addition to the flat-rate operating expenses is therefore not permitted.

If childcare is provided in the child's parents' home or in other premises provided free of charge by the local authority, for example, the following flat-rate operating expenses may not be deducted. In these cases, the operating expenses must be itemised.

How high is the flat-rate operating expense allowance for children in childcare and how is it to be allocated?

From the 2023 assessment period, the flat-rate business expenses allowance for children in childcare, which was created specifically for childminders, will be €400 per child in full-time care per month. For assessment periods up to and including 2022, it amounts to €300 per full-time child per month.

The flat rate is based on a care period of eight hours or more per child per day for five days of care per week (= weekly care period of 40 hours). If childcare is provided for fewer hours per day, the lump sum must be reduced proportionately. A deduction of the lump sum for operating expenses is only possible up to the amount of the operating income, i.e. the deduction of the lump sum for operating expenses must not result in a loss.

The monthly business expense allowance is calculated for each child cared for from the 2023 assessment period as shown below. For assessment periods up to and including 2022, a lump sum for operating expenses of € 300 is to be recognised instead of the lump sum of € 400.

a) Calculation formula:

400 x agreed weekly childcare time (max. 40 hours)
(8 hours x 5 days =) 40 hours

b) Table for determining the monthly flat-rate operating expenses for children in care with regular childcare hours:

Here are some examples:

• Childcare 7 hours a day, 5 days a week: €350
• Childcare 6 hours a day, 5 days a week: €300
• Childcare 5 hours a day, 5 days a week: € 250
• Childcare 4 hours a day, 5 days a week: € 200
• Childcare 4 hours a day, 4 days a week: € 160

Please note:
If so-called free places are occupied on a daily basis, the flat-rate operating expense allowance for children in care, reduced if necessary according to the above formula or table, is to be granted pro rata temporis (number of days occupied/flat-rate 20 working days per month).

For periods in which you are unable to complete the agreed childcare hours yourself (e.g. due to holiday, illness or further training), you can only deduct the flat-rate business expenses allowance if the childcare allowance continues to be paid for this time.

How much is the lump sum for operating expenses for free places and how is it to be divided up?

If you are paid ongoing cash benefits in accordance with Section 23 SGB VIII for so-called free places (= places that can be occupied at short notice in the event of illness, holiday or training replacement of another childminder), you can deduct a flat rate of €50 per free place and month from the income paid for the free place as operating expenses from the 2023 assessment period (up to and including 2022: €40) instead of the actual operating expenses for reasons of simplification. If the free workstations are actually occupied, the flat rate for free workstation operating expenses is to be reduced pro rata temporis (= ratio of the days on which the free workstation is occupied per month to a flat rate of 20 working days per month).

Is it also possible to provide an itemised statement instead of the lump sums?

Proof of the actual operating expenses is the rule; taking the flat-rate operating expenses into account is a permissible simplification rule. If the actual costs are higher than the total flat-rate business expenses for all children cared for, it is more favourable from a tax perspective to waive the simplification rule. The deduction of actual business expenses requires that all individual receipts are collected and submitted to the tax office in an itemised list. For details on possible business expenses, see "What counts as business expenses?".

Please note:
If the operating expenses are itemised, the additional deduction of flat-rate operating expenses is not permitted.

When and how much tax is due?

Tax is only payable if your total taxable income exceeds the basic tax-free allowance limit of €10,908 in 2023 (€10,347 in 2022) for single people and €21,816 in 2023 (€20,694 in 2022) for married couples. If your total income falls below these amounts, no income tax is payable.

In addition to the income from daycare (= profit), your total taxable income may also include other income (e.g. income from letting and leasing or other income from pension payments) and that of your spouse if you have applied for joint assessment.

Note:
If you would like to calculate your expected tax burden, you can use the free interactive tax calculator on the website of the Federal Ministry of Finance.

What is the advance income tax payments all about?

While income tax is withheld monthly from wages in an employment relationship and paid to the tax office by the employer, income tax is levied on self-employed persons using the so-called advance payment procedure. For this reason, the tax office responsible for you will check in the year you set up your business on the basis of the information you provide in the form "Questionnaire for tax registration when taking up a commercial, self-employed (freelance) or agricultural activity or participation in a partnership/community" whether you are required to make advance income tax payments and, if so, how much. In subsequent years, the advance payments are generally calculated on the basis of the income tax resulting from the last assessment. The advance payments are determined in a notice and are to be paid quarterly on 10 March, 10 June, 10 September and 10 December of each year. The advance payments already made are offset against the annual tax liability.

Please note:
Advance payments only have to be made if they amount to at least €400 in the calendar year and at least €100 per advance payment date. If there are any changes in the current calendar year compared to the previous year (e.g. due to cancellation or the commencement of a new childcare contract), you can apply to your local tax office at any time to increase or reduce the advance payments.

What do I need to bear in mind when filing my income tax return?

Self-employed persons are obliged to submit an income tax return. This must state the profit from the self-employed activity.

Day carers must make their entries in line 4 of Annex S to the income tax return for 2022.

If they choose to determine their profits by means of an income surplus calculation (see question 4), day carers must always submit the EÜR annex to the tax return electronically authenticated to the tax authorities in accordance with the officially prescribed data set. The "My ELSTER" service portal offered by the tax authorities is available free of charge for this purpose (prior registration required).

At first glance, the EÜR attachment for 2022 appears very extensive. However, if you make use of the business expense allowances, only two entries are generally required. On the one hand, entries must be made in line 15 on the operating income side (see also "What do I have to consider for VAT?") and on the other hand, entries must be made in line 23 of the EÜR annex on the operating expenses side (see also "What is the advantage of flat-rate operating expenses?", "What are the requirements for the deduction of business expense lump sums?", "How high is the business expense lump sum for supervised children and how should the business expense lump sum be allocated?" and "How high is the business expense lump sum for free places and how should it be allocated?").

Note:
All self-employed persons must submit their 2022 tax return electronically to the relevant tax office by 2 October 2023 at the latest The "My ELSTER" service portal offered free of charge by the tax authorities (prior registration required) is available for the electronic submission of income tax returns.

In certain cases, electronic authenticated transmission of the respective tax return is required by law. You will receive the required certificate when you register with "My ELSTER". Please note that the registration process can take up to two weeks. With the certificate, you can create tax returns directly via "My ELSTER" or submit them electronically authenticated from ELSTER forms or any authorised third-party software.

If you cannot reasonably be expected to submit tax returns to the tax office electronically, the tax office can authorise submission in paper form on request.

Further up-to-date information on the ELSTER procedure can be found at www.elster.de.

The deadline for submitting your income tax return is extended until 31 July 2024 for the 2022 assessment period if you have commissioned a member of the tax advisory professions to prepare your tax return. In individual cases, the tax office can also request the tax return ahead of time.

How are childminders covered by health and care insurance?

Self-employed childminders can join a statutory health insurance scheme if they were covered by statutory insurance before they started working as a childminder - either as an employee or as an unemployed person. Those who only provide a small amount of childcare may be covered by family insurance under the statutory health insurance scheme. Day carers can also be insured through a private health insurance company.

The following applies to voluntary members of a statutory health insurance scheme:

Since 1 January 2023, the minimum contribution assessment basis (§240 SGB V) for low-earning self-employed persons has been an average taxable income of more than €1,131.67 per month.

Of this, 14% must be paid in contributions for voluntary membership in statutory health insurance. Childminders can also choose to take out additional sick pay insurance in order to receive sick pay or maternity benefit in the event of illness. A total of 14.6% is then due.

If the average taxable monthly income from self-employment is less than €1,131.67, the minimum contribution of €158.43 (without sick pay) or €165.22 (with sick pay) is due. In addition, the additional health insurance contribution of approx. 1% is due.

If the actual income is higher than € 1,131.67, the contribution is calculated on the basis of the actual (proven) income.

Note: The contributions based on income are determined on the basis of the last income tax assessment notice issued. If self-employment has only just commenced, the contributions are determined on the basis of the proven expected income.

From 1 January 2018, contributions to health/nursing care insurance will be set provisionally. The assessment is based on the actual income subject to contributions from the respective income tax assessment. This can lead to back payments or refunds of contributions.

In addition to the reimbursement of accident insurance contributions and half of the contributions for appropriate pension provision, the reimbursement of half of the proven expenses for appropriate health and long-term care insurance by the local youth welfare organisation is also stipulated by law. The reimbursement of social security contributions is also tax-free. These do not count as taxable operating income.

The health and long-term care insurance contributions paid by the company itself (i.e. the contributions less the subsidies received) can be claimed as special expenses. It should be noted that the full contribution to health and long-term care insurance (including the subsidies) must first be declared in the pension expenses annex. The reimbursed contributions must then be declared in line 21 (statutory health insurance) or line 26 (private health insurance). The same applies to contributions to an appropriate pension scheme. The subsidies received must be stated in line 7.

The following applies to family insurance (§ 10 SGB V):

Anyone who only looks after children in day care for a small amount of time (i.e. is not self-employed full-time) and has a taxable income of less than €485.00 per month can be co-insured as a married person in the family insurance scheme if the spouse is a member of the statutory health insurance scheme. Whether a main occupation is to be assumed must be clarified with your health insurance fund on a case-by-case basis. Sickness benefit insurance is not possible for family members and maternity benefit cannot be claimed.

Contribution rates and income thresholds 2023 - Federal Ministry of Health

Who do I contact if I have further questions?

For further tax information, please contact your local tax office.

For non-tax-related questions about child day care, please contact the youth welfare office responsible for you, the specialist child day care service or the Hessian Ministry for Social Affairs and Integration, which has also published the flyer "Become a childminder" for initial information. In addition, the website of the Hessian Child Day Care Office contains a wealth of information on child day care, including legal issues.