First thing to realize is that you take your total income and deduct your expenses for operating your daycare and the amount that is left is the amount your taxes are based on - not the total you earned. So if you earned $35,000 but had expenses of $15,000 which is possible by the time you do business use of home, food, toys, equipment etc. then you will only be taxed on $20,000 of income. Since one of the first thing you deduct is your basic personal exemption line 300 which is $10,527. You can see how your taxable income can very quickly go down.