Is your homeschool co-op’s hired teacher really an employee?

A homeschool nonprofit I work with called me quite frantic.  They had received a letter form the IRS.  It seems that a former teacher of one of their classes  was asking for an examination of her status as an independent contractor (using IRS Form SS-8).  She thought that she should be classified as an employee of this homeschool nonprofit.  If the IRS agrees with this worker, the homeschool organization may have to pay back taxes (Social Security and Medicare) and perhaps penalties.

Fortunately this homeschool group did many things right:

How about your homeschool group?  Would you pass an IRS examination?

Do your hired teachers sign an Independent Contractor agreement?

Do you avoid controlling their work as you might an employee?

Here’s a helpful IRS brochure regarding employee or independent contractor status (IRS Pub 1779).

I’ve written about paying teachers in a homeschool co-op setting:

Paying teachers in a homeschool co-op

W-2 and tax filings for teachers

Finally, my ebook Paying Workers in a Homeschool Organization is also helpful with examples of the forms your need to file.

Carol Topp, CPA

Homeschool Support Group asks: Am I doing everything legally?

We live in California and started a homeschool group about 5 years ago. We average about 80 families a year. We are strictly social/support, not a co-op. We have different clubs that meet once a month.  These are taught by moms who want to and all parents stay and participate. We also have parties and take field trips together.

We do collect $20 a year per family to off-set the cost of parties and clubs so that no one person has a financial burden. We have kept things simple all of this time and operate on a cash only basis. We carry over a balance to make sure that our kick-off parties are paid for. We collect approx. $1600.

My question is- Am I doing everything legally? It is my intention to make sure I am being legal. I would like to continue to keep things this simple

I have had some doubt due to the homeschool co-op in town that has a 501 (tax exempt status) and charges members higher prices due to church rental and insurance. However, I have been questioned why we don’t have to do that?

Any insight would be helpful.

Thank you!
Vanessa

I think you’re understanding things correctly and doing many things just fine for a group of your size.

Technically, your support group would be considered an unincorporated association and the IRS would probably classify it as a 501c7 Social Club. I discuss Social Clubs on these two blog posts:
Are Homeschool Support Groups Automatically Tax Exempt?
Compare 501(c)(3) Charity to 501(c)(7) Social Club

Homeschool co-ops are different from support groups. Co-ops do not usually fit the definition of 501c7 Social Clubs; They exist for more than just social reasons; they have an educational  purpose. In additional co-ops collect more money than support groups and so they look into 501c3 status as a tax exempt educational organization.

So, Vanessa, you can tell people who ask that support groups and co-ops are different. The link above compares the two.

Carol Topp, CPA

What Determines Independent Contractor Status?

Many homeschool organizations hire workers and treat them as independent contractors.

Is your co-op’s hired teacher really a contractor or an employee?

Sometimes it is not easy to tell.  Here is a helpful article and chart to assist homeschool leaders in classifying workers correctly.

No one factor determines contractor status

Whether an individual working for your company is an employee or an independent contractor can sometimes cause confusion. Here are some guidelines that will help you know where to draw the line and avoid costly penalties from the IRS and other government agencies.

Hiring someone on an independent contractor basis can have many advantages for employers. For example, independent contractors can:

• Be hired on a per-project basis and let go when the project is completed.
• Be more experienced workers who want to maintain a degree of independence. In other words, they don’t require the supervision that is necessary with employees.

And you don’t have to pay fringe benefits or workers’ compensation for independent contractors.

Or do you? Although most companies are aware of the problems of misclassifying employees as independent contractors, expensive situations still arise. Misclassifying someone can lead to back taxes, penalties and fines. So it pays to know the difference.

Generally, the degree of control you exercise over the worker determines whether he or she is an employee or independent contractor. For example, an employer would probably provide a workers’ materials and tools, while independent contractors usually provide their own. An employer sets an employee’s work hours while an independent contractor usually has the right to set his or her own schedule. In addition, the more “integrated” or central a job is to a company’s operations, the more likely the worker is to be considered an employee. The chart below can help you determine whether a worker is an employee or an independent contractor.

Unfortunately, no single factor determines a worker’s status. The IRS and other government agencies, as well as courts that hear related cases, examine a variety of factors. To protect your organization, you can request documents from an independent contractor that will help you prove his or her status in the event the IRS or other government agencies ask for it. These include copies of advertising or directory listings, business name statements, an Employer Identification Number (if he or she has employees), and business licenses or professional licenses.

Employee	Independent Contractor
Worker must obey instructions concerning when or how to perform the job.	Worker is responsible for the outcome of the job and can determine how it is to be done.
Company provides training.	Worker may be licensed by a state board and may have invested considerable sums in training.
Services must be performed by the worker. The company hires, supervises or pays a worker’s assistants.	Worker can hire assistants and is responsible for their pay.
The worker has an ongoing relationship with the company.	Worker advertises or otherwise makes his or her services available to the general public.
The company sets the work hours.	The worker can set his or her own hours.
The company requires full time work at its business.	Worker can work for more than one company at the same time.
The company controls where the work is performed and determines the order in which tasks are done	The worker can complete tasks at his or her office or home. He or she decides how to finish the job.
The worker receives payment by hour, week or month.	Independent contractors are usually paid on a per job or commission basis.
The company provides tools and materials.	The worker provides his or her own tools, materials and facilities and has often made a significant investment in them.
The worker generally does not take on any financial risk and the company pays travel and business expenses.	The worker can realize a profit or loss from a job and generally pays the expenses incurred in completing the job.
The worker can usually quit without liability for failure to complete a job.	The worker is liable for completing a job according to contract.

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I share a 20 questions test the the IRS has used to determine employee and Independent contractor status in my ebook  Paying Workers in a Homeschool Organization.

Carol Topp, CPA

Congratulations to MEC on 501c3 tax exempt status!

The Myerstown Enrichment Center in PA was just granted 501(c)(3) tax exempt status with the IRS!

The homeschool co-op decided to apply for tax exempt status with  the IRS on their own. But unfortunately they ran into some snags.

They had checked a box to apply as a school, but the IRS suggested they did not fit the description of a school.

One of their leaders wrote to me:

I have gotten several letters from the IRS requesting more information or explanations of something.  Each time, my time to respond gets shorter and shorter. I am feeling very unqualified to continue.

I helped them sort things out with the IRS, wrote a letter, talked to the IRS examiner and faxed her information when asked.

We are so pleased to announce that they are now a 501(c)(3) tax exempt organization!

The leader told me:

Something for you to consider:  mention in your seminar that co-ops are applying for 509(a)(2)* under 501 (c)(3) and then maybe those of us who are confident enough to fill out our own forms might get it right the first time.
Or, you could create a self-help packet to sell to said individuals.

* an organization that receives its income from membership fees or activities related to its purpose and not a school

The other week, the president and I were discussing this whole process and we regret that we just didn’t have you do it for us from the beginning.

Again, thank you for your help!
God bless you!

I am working on putting the final touches on that “self-help” packet mentioned; it’s an ebook titled “The IRS and Your Homeschool Organization. I hope to release it in September.

Carol Topp, CPA

Getting people to help in a co-op

I just found out about One-by-One (a book on motivating members in a homeschool group), it sounds like JUST what I need, I’m excited to order it. It’s the biggest struggle and frustration I have, trying to get people involved, committed and to follow-through! Really hoping the book can help me figure out how to get members out of the “give-me” mode!!! How do you ladies accomplish this?

New article on homeschool support groups and the IRS

photo credit: Keith Williamson

I just uploaded a new article onto my Leader Tools/Articles page

Are support groups automatically tax exempt?

It discusses the difference between homeschool co-ops and support groups in the eyes of the IRS and the benefits of being a support group!

Here’s what one homeschool leader said when I shared this article:

The path I believe we will go down is to become a  Non Profit Corporation and then (be a) 501(c)7.  You provide a great and much needed service to homeschooler support groups and co-ops.  I wish our previous board knew about you and your web site.  I certainly will be spreading the word.

Thanks again.  I hope I get to meet you in person some day.

Jeff

If you haven’t read the articles on my Leader Tools page in a while, why not print some out and share them with your board?

Helping you lead your homeschool group,

Carol Topp, CPA

Can we accept donations from Paypal and Google checkout

photo credit: iliveisl

From my understanding, you can’t use Google checkout for donations unless we are a 501(c)(3)
http://checkout.google.com/support/sell/bin/answer.py?hl=en&answer=72721
http://www.google.com/support/forum/p/checkout-merchants/thread?tid=00a314399fff1200&hl=en

I do think you can use PayPal for donations, even if we aren’t a 501(c)(3). It’s taxable but considered a gift. Do I understand this correctly?

You are correct  that only donations to a 501(c)(3) organizations are tax exempt.

I read the links you provided and Google only allows 501(c)(3) and 501(c)(6) (Business leagues with a 501c3 charitable fund) organizations to accept donations.

Paypal is much  less restrictive (but the IRS determines which donations are tax deductible, not Paypal!)

If your organization’s website accepts donations and is not a 501c3, then the income is fully taxable.

FWIW, here’s a chart explaining the various 501c types and when tax deductible donations are allowed by the IRS: http://www.guidestar.org/help/501c_orgs.jsp

How can your homeschool group become a 501(c)(3) tax exempt organization? Start by reading these articles:

501c3 tax exempt status

• When to become a 501c3?
• Do we need 501c3 status?
• Are you ready for 501c3 Application?
• A checklist for organizations desiring 501c3 status

Carol Topp, CPA
HomeschoolCPA.com

What is Unrelated Business Income Tax?

Sometimes a homeschool group brings in a lot of money from fund raising. These efforts are so successful you may wonder if your group owes anything to the government in taxes. For the most part, fund raising is not considered part of your group’s mission; it is just a means to the end. After all, your group’s mission is to encourage homeschooling, not to sell ads, pizza or other products.

The Internal Revenue Service calls the money you raise “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission. The IRS assess a tax on unrelated business income called the Unrelated Business Income Tax or UBIT. The purpose of this tax is to prevent nonprofit, tax-exempt organizations from having an unfair advantage over the for-profit marketplace.

The best example of unrelated business income is a gift shop in a nonprofit hospital. The income from a gift shop is not related to the hospital’s primary purpose of giving medical treatment, so the profits from the gift shop are taxed.

Your homeschool organization could have unrelated business income if you sell T-shirts, candy bars, entertainment books, candles, pizza coupons and a host of other products or if you make money from ads or Amazon commissions on your website.

Fortunately the IRS has several exceptions to paying the UBIT tax:

• A $1,000 threshold allows that the first $1,000 in profit from an unrelated business will not be taxed.

• If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.

• If the fundraiser is not regularly carried on, such as a once-a-year spaghetti supper, then the proceeds are not subject to UBIT.

• If you are selling donated items, like in a garage sale, the income raised is not taxed.

One of these exceptions are bound to apply to most homeschool organizations.

The rules regarding UBIT are complex. You can read more about UBIT in IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations (http://www.irs.gov/pub/irs-pdf/p598.pdf).

Carol Topp, CPA

We’re not 501c3 and don’t want to be!

photo credit: stevendepolo

Our support group has been in existence over 20 years… and we are    STILL    not    a 501(c)(3) …. and don’t want to be!

It would take so much more work, money, etc. to be a 501(c)(3)!!

Many times it is hard for our members to understand this — they think any group who’s not set up as a ‘business’ to ‘make money’ has to be a 501(c)(3).  Our group does NOT take donations — membership fees cover our cost of doing business. And they are reasonable — $10 a year, to get our newsletter via email, $20 if you want it printed and mailed to you.  We put out a group directory each year, pay for some things like church rental for our Back to School meeting, copies of membership forms & information about homeschooling that we distribute, etc.

Karleen
Conroe, TX

Karleen,

I need to warn you in your some of your assumptions. I’m a CPA and work with homeschool organizations to organize properly and decrease their tax liabilities by obtaining tax exempt status with the IRS.

I answered a leader who asked, “Can’t we operate without IRS tax exemption?” in this blog post:
http://homeschoolcpa.com/cant-we-operate-without-irs-tax-exempt-status/

You wrote: “they think any group who’s not set up as a ‘business’ to ‘make money’ has to be a501(c)(3).”

They are partially correct. If your organization makes a profit, it owes tax unless it is legally tax exempt.

If your group is a nonprofit (i.e. no profit motive) you have one of 4 legal choices:
(see all this in detail on my website http://homeschoolcpa.com/group-over-the-5k-limit-what-to-do/

1. Stay small and remain under the IRS threshold for filing for 501c3 status. The IRS threshold is $5,000 in gross annual income. If you bring in more than $5,000 a year, you must legally do one of the three following options.
2. Consider another tax exempt status such as 501c7 Social Club if you are a support group. See my blog posts on that issue here http://homeschoolcpa.com/are-homeschool-support-groups-automatically-tax-exempt/
3. File for tax exemption under 501c3 as an educational organization
4. Pay your taxes.

In a nutshell, a homeschool group must be be small enough, fit the 501c7 Social club definition, or file for tax exempt status to avoid paying tax.

Just because you do not accept donations does not exempt you from the IRS and tax regulations.

The USA offers a wonderful opportunity for nonprofit groups to keep all of their surplus and avoid paying taxes on it. But it does mean filing one time a document with the IRS to become a tax exempt organization.

I hope that clears things up a bit.

Carol Topp, CPA
HomeschoolCPA.com

Where does a homeschool leader go for support?

Homeschool leaders need support and encouragement as they seek to serve other homeschooling families.

Two places that support the group leader are:
The Old Schoolhouse (TOS) magazine Leadership Yahoo Group:
http://groups.yahoo.com/group/TOSHSN_Leadership_Group/join

and the I am A Homeschool Group Leader Facebook group
https://www.facebook.com/groups/72534255742

Both are great places for you to ask questions, get tips and share advice in running your homeschool support group or co-op!

Carol Topp, CPA