Learn How Buying a Childcare Center and Keeping its Employees Can Save You Thousands in Payroll Taxes

Alexis Louis
Mar 21
6 min read

Imagine you've just purchased your dream business—a childcare center. The building is beautiful, enrollment is at 75%, and the employees are already in place. You walk in on your first day as the owner, but your heart is racing. Not because you're nervous about leading a team, but because of finances. Payroll taxes, startup costs, and unexpected expenses are adding up fast.

You want your childcare business to thrive—to be profitable while supporting the children and families you serve. But you've already poured your life’s savings (plus family & friends’ money) into this investment. What if there was a way to keep more of your hard-earned money by saving thousands on payroll taxes?

Good news—you can. Keep reading to learn how one childcare center saved $15,050 using a little-known payroll tax strategy.

If you buy a childcare center and keep the same employees, you can save thousands of dollars on payroll taxes. Many new daycare owners pay more tax than they need to because they don’t know about these tax savings! So, today we will tackle one of the questions we get most often:

How can I save money when I buy a childcare center?

This guide applies to almost anyone who bought a childcare center that was already open and operational.

An existing childcare business owner buying a location from someone retiring
An aspiring daycare center owner purchasing an existing daycare business from a broker or business listing site (like bizbuysell)
A director who is purchasing the center from her employer

However, if you are building a childcare center from the ground up or purchasing an empty building that you're going to retrofit into a daycare these savings unfortunately don't apply.

Now that we know which kind of childcare business purchases can get these tax savings, we'll break down the process of how you can qualify and get to the money.

How You Can Qualify for Payroll Tax Savings When Buying an Established Daycare Facility

To get these tax savings, make sure:

You buy most of the old business’s property – This means you took over nearly everything the previous daycare owner used to run the center, like the equipment, furniture, toys, supplies, and the building (even if it's just the lease).
You keep the same employees – The workers who were there before you bought the preschool should still work for you after your purchase. The savings can still apply even if the previous childcare business owner was acting as the director or employed their family members and will no longer be employed after the sale.
The wages were paid in the same calendar year – The old owner must have paid the childcare industry employees earlier in the same year before you took over.

Meeting these rules benefits you if continue the previous daycare owner’s payroll tax history, which can save you thousands of dollars in taxes!

Before we get to why it is important to use the previous daycare owner's payroll tax history, let's look at what payroll taxes childcare centers generally pay.

What Payroll Taxes Do Licensed Daycare Centers Pay for Employees?

As a childcare business, you have to pay taxes for every early childhood educator you hire (including preschool teachers, Montessori guides, Pre-K teachers, co-teachers, or floaters). These taxes include:

FICA Tax (Social Security & Medicare): Childcare Employers pay 7.65% of each employee’s wages.
FUTA Tax (Federal Unemployment Tax): Employers pay 6% on the first $7,000 of a childcare employee’s wages, but this can be lowered.
SUTA Tax (State Unemployment Tax): This tax depends on what state your center is in, but new businesses often pay more without the right strategies.

*Quick note: you pay these taxes for ALL of your staff including your director, chef/cook, janitor, bus driver, pretty much anyone who is on your payroll*

But, when you buy a center from someone who already has it fully operational with employees, you don't have to pay as much payroll tax (since you've found the right childcare accountant *wink*).

Let's get to an example of how things typically work when you purchase a daycare:

How a Childcare Business Owner Can Save $15,050+ in Payroll Taxes

Let’s say you buy a childcare business with 25 employees, and each employee earns $30,000 per year. Here’s what your payroll taxes might look like, stick with us there's some light math involved:

Without Tax Savings (Paying Too Much)

If you don’t plan properly, you could end up paying:

FICA Taxes (Employer Portion):
- $30,000 × 7.65% = $2,295 per employee
- $2,295 × 25 employees = $57,375 total
FUTA Taxes:
- $7,000 × 6% = $420 per employee
- $420 × 25 employees = $10,500 total
SUTA (state unemployment tax)
- $7,000 x 2.7%=$189 per employee (using Tennessee's rate)
- $189x 25 employees =$4,725

Total Payroll Taxes: $72,600 without a plan

With Smart Tax Savings

Remember when we talked earlier about using the previous daycare owner's payroll tax history? This is where the tax savings arrive. The best way to explain this is to give an example, we'll use our home state of Tennesee.

When you register as a new childcare employer, you're automatically assigned a 2.7% unemployment tax rate and you have to keep that rate for 3 years.

Buuuuut, since you're purchasing a childcare business from an experienced employer, their rate may be between 0.01% and 10%.

Here's how this could save you thousands...

Registering as a new business with 25 employees would run a payroll tax bill of $4,725 because of the 2.7% rate. (as we showed in our example above)

Those same 25 employees would only run a tax bill of $175 if you instead utilized the .01% tax rate from the old employers' experience.

This would result in tax savings of $4,550 and could last for several years depending on how you invest in your employees and how long they stay employed by you.

In addition to the state savings, you could also use the previous owner's tax history when it comes to the IRS payroll taxes.

Similar to the state the IRS charges an unemployment tax of 6% and since the previous owner has already paid the employees you can skip the extra taxes based on what they old owner already paid. Using our example above the FUTA tax would be eliminated for the first year if the employees had already been paid $7,000.

This would result in additional tax savings of $10,500.

With both of these, combined payroll tax savings would be $15,050 in your first year after buying the childcare center.

The best part is you can still get these tax savings (as refunds) up to 3 years after you bought the preschool.

What You Need from the Previous Childcare Business Owner

To claim these tax savings, ask the old owner for:

Payroll records – Show how much each employee has been paid this year.
Form 941 – This report shows what payroll taxes have already been paid.
Form 940 – This report covers unemployment taxes.
State unemployment tax rate proof – This helps you keep a lower tax rate.

Sometimes, the new childcare business owner needs to include a request in the purchase agreement to get year-to-date payroll records and past state unemployment tax (SUI) records. This helps ensure you can continue using the old employer’s tax rates. It’s not usually a problem, but many daycare buyers forget to ask until after the sale, when it can be harder to get the information.

Getting these records will help you avoid paying extra taxes and make the transition smooth and easy!

Frequently Asked Questions (FAQs) About Buying a Childcare Center

Q: Can I still save money if I already bought a childcare center but didn't apply these tax strategies?

A: You have up to 3 years after you purchased the center to claim these savings! Little Ledgers can help you to recover these overpaid payroll taxes.

Q: Can I qualify for these savings if I buy a center from a retiring owner?

A: Yes! As long as you retain employees and structure the purchase correctly, you can still benefit.

Q: What if I operate multiple childcare locations already?

A: You may be able to combine the employees with your existing payroll and get the tax savings.

Q: How can I save on taxes if I'm under contract to buy an existing childcare center?

A: To get the most payroll tax savings after buying a childcare center, you’ll need some important records from the previous owner. Ask the previous owner for:

Payroll records that show how much each employee has been paid this year and how much the center has already paid in Social Security, Medicare, and unemployment taxes.
Copies of Form 941 (a report sent to the IRS every three months about payroll taxes) and Form 940 (a report for unemployment taxes).
Proof of the state unemployment tax rate so you can keep a lower rate if possible.
If the center used a payroll service or a company that handled their employees, get reports that show what taxes have already been paid. Having these records will help you avoid paying extra taxes and make the transition smooth!