Texas doesn’t have a state income tax, which is a genuine advantage for business owners. But that doesn’t mean your for-profit childcare business is free from tax obligations. There are several requirements at both the federal and state level that you need to stay on top of throughout the year.

Your federal income tax obligation depends on how your business is structured. Sole proprietors report childcare income on Schedule C attached to their personal return. LLCs taxed as partnerships or S-corps pass income through to the owners’ personal returns. C-corps file a separate corporate return. Regardless of entity type, you’ll likely owe quarterly estimated tax payments to the IRS if your annual tax liability exceeds $1,000. Missing those quarterly deadlines triggers underpayment penalties that add up fast.

Texas requires most businesses to file an annual franchise tax report by May 15. Businesses with total revenue under $2.47 million owe no franchise tax, but you still have to file the report. Skip the filing and the state can forfeit your business entity, which creates problems with licensing, banking, and everything else. If your revenue exceeds that threshold, the tax is calculated on your margin using one of several methods. Your accountant should run the numbers under each method to find the lowest legitimate amount.

Most childcare businesses have W-2 employees, which means payroll tax responsibilities. You’ll withhold federal income tax and the employee share of Social Security and Medicare from each paycheck, then pay the employer match on top of that. You’re also responsible for federal unemployment tax (FUTA) and Texas unemployment insurance through the Texas Workforce Commission. New employers receive an assigned TWC tax rate that adjusts over time based on your claims history. Getting payroll wrong creates compounding problems because the IRS treats payroll tax issues more seriously than almost any other compliance failure.

Childcare services are generally exempt from Texas sales tax. You won’t collect sales tax on tuition or care fees. However, if you sell tangible goods to parents like uniforms, supplies, or branded merchandise, those sales may be taxable. Keep service revenue and product sales tracked separately so the distinction is clear.

A few other items to be aware of. If you hire independent contractors for cleaning, maintenance, or other services and pay them $600 or more in a year, you need to issue 1099 forms. Meals provided to enrolled children may qualify for USDA food program reimbursements, which come with their own reporting rules. And if you own your facility, Texas property taxes will be a significant annual expense to budget for.

The biggest thing that trips up childcare business owners is falling behind on record keeping and then facing a stressful scramble at tax time. Parent payments, employee wages, food costs, licensing fees, supply purchases, and program expenses all need to be categorized correctly throughout the year. Clean books make quarterly estimated payments predictable and annual filing straightforward. If you’re not sure where you stand, working with someone who provides small business tax and bookkeeping services and understands the childcare industry can save you from costly surprises down the road.