You report that you are self-employed on schedule C. You report the gross income, and you can deduct legitimate expenses. For a home day care, this can include a percentage of your housing costs, you can start to research this here.
https://www.irs.gov/taxtopics/tc509
You pay income tax and self-employment tax on the net profit. Your compensation for IRA purposes is your net profit minus half the self-employment tax, so your compensation is about 92% of your net profit after expenses.
Note that if married, your spouse can also make an IRA contribution based on your compensation, even if your spouse does not have compensation in their own name. It is not necessary to make your spouse a co-owner or employee of the business.
However, note that if you fail to report your legitimate expenses in order to claim higher compensation and make a larger IRA contribution, that can be considered tax fraud if you are audited.
