Tennessee Daycare Business Setup: EIN, LLC, Business License, and Tax Basics

Business Structure Before You Open

Getting your TDHS child care license is only half the equation. You also need to choose a legal business structure, determine whether you need a federal tax ID, handle any local business registration, and understand how Tennessee taxes home-based child care income.

The TDHS licensing process doesn't dictate your business structure — you choose it. But the choice affects your personal liability, your tax treatment, and how you handle insurance.

Sole Proprietorship vs. LLC

Sole proprietorship is the simplest option. You don't file any formation documents with the state — you just start operating under your own name (or file a DBA if you want a business name). Income flows through your personal tax return on Schedule C. The downside: no liability separation between your business and personal assets. If a parent sues, your personal savings and home equity are exposed.

LLC (Limited Liability Company) can help separate your business assets and personal assets. Tennessee LLC formation costs $300 for the initial filing with the Secretary of State plus a minimum $300 annual report fee. You'll also need a registered agent (can be yourself at your home address).

An LLC is one option providers consider because of the liability exposure inherent in caring for other people's children. The $300 minimum annual cost is a recurring business expense, not a substitute for liability insurance.

Getting Your EIN

An Employer Identification Number (EIN) is your business's federal tax ID. You generally need one if you form a partnership, corporation, or multi-member LLC, plan to hire employees (including a second educator for group home compliance), or have certain federal tax obligations. A single-member LLC without employees may not need one for federal tax purposes, but you may request one for banking or state tax purposes.

Apply for free through the IRS website — it takes about five minutes and you'll receive your EIN immediately. Don't pay a third-party service to do this for you.

Local Business License

Local business-registration requirements vary by city and county and are separate from your TDHS state license. The specifics vary by location:

• Nashville: $15 annual business license through the Metro Nashville Clerk
• Memphis: Privilege License through the Memphis Finance Division (within city limits) or Shelby County Clerk — $15 annual fee
• Knoxville: No separate city permit or application fee required for home occupations
• Chattanooga: Check with the City of Chattanooga or Hamilton County Clerk for local business-registration requirements

Check with your local clerk's office for the exact registration process and fees. Some rural counties have minimal requirements.

Tennessee Tax Obligations

Tennessee doesn't have a personal income tax on wages, but home daycare income is subject to:

Federal self-employment tax (15.3% on net earnings) and federal income tax — reported on Schedule C if you're a sole proprietor or single-member LLC.

Tennessee Business Tax — business-tax registration and payment depend on your gross receipts, classification, and location. In-state businesses with gross receipts from $3,000 to $100,000 generally need a minimal activity license; at $100,000 or more, a standard business license and business-tax filing may apply. Check with the Tennessee Department of Revenue.

Local Privilege Tax — some cities impose their own privilege or business tax on top of the state business tax.

Tax Deductions for Home Daycare Providers

Home-based daycare providers can deduct a significant portion of their household expenses because you're using your home for business. Common deductions include:

• Home use percentage — the portion of your home used for child care, applied to mortgage interest or rent, utilities, insurance, and maintenance
• Meals served to children — if you're not reimbursed through CACFP, or the portion not covered by CACFP
• Business insurance premiums — liability insurance, professional liability, property coverage
• Supplies and equipment — toys, art materials, cribs, changing tables, safety equipment
• Training costs — continuing education courses, conference registration
• Licensing fees — your TDHS license fee and local business registration fees

Keep meticulous records of every business expense. A CPA experienced in home-based child care can structure your deductions to minimize your tax burden — the complexity of the home-use calculation alone usually justifies the cost of professional tax preparation.

Setting Up Your Business Bank Account

Open a separate business checking account for all daycare income and expenses. This makes bookkeeping straightforward, simplifies tax preparation, and — if you're an LLC — maintains the liability separation between personal and business finances.

Banks may request your EIN, LLC formation documents (if applicable), and other business records. Requirements vary by bank.

The Tennessee Home Daycare Licensing Guide covers business formation alongside the licensing process, including a startup cost worksheet that helps you budget for both regulatory compliance and business setup expenses.

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