Should your homeschool group be an LLC?

Limited Liability Company (or LLC) is a relatively new type of business structure. Several homeschool leaders have been asking if its something their homeschool group should consider.

In particular, many homeschool groups wonder if they should file for LLC status as part of becoming a 501(c)(3) tax exempt organization.

Caution:  I am not an attorney, nor am I offering legal advice.  I will relay what I have leaned about LLC’s filing for 501c3 tax exemption from the IRS, but I am not offering a legal opinion. I recommend that you seek legal counsel if you pursue either option.

Only recently has the IRS granted 501c3 tax exempt status to LLCs. LLCs are a relatively new business structure (only available in all 50 states in the mid 1980′s) and the IRS is slow to accept changes. In a document titled “Limited Liability Companies as Exempt Organizations-Update” (2001 Exempt Organization CPE Text. Available at http://www.irs.gov/pub/irs-tege/eotopicb01.pdf ) the IRS outlined 12 conditions that an LLC must satisfy to qualify for exemption under IRC (Internal Revenue Code) 501c3.

These conditions are legally complex and I would strongly recommend that you seek experienced legal counsel before organizing a nonprofit LLC.

I read an article titled “Nonprofit LLCs: Time for a New Experiment” (http://www.mayer-riser.com/Articles/nonprofit/npllc.htm) and the author, a nonprofit attorney, advises:

Until state legislatures address the unresolved issues, the actual use of the LLC form by nonprofit organizations should be undertaken only after careful review of current law in the applicable jurisdictions, and only with the assistance of qualified counsel with experience in drafting complex and detailed operating agreements and experience in the law of tax-exempt organizations.

Unfortunately, at the time of the article in 2002, only 11 organizations had obtained 501c3 status as LLCs, so experienced assistance may be difficult to find.

The reason that most businesses use the LLC structure is for limited liability. I organized my own sole proprietorship accounting practice as an LLC  because I wanted limited liability and protection of my personal assets. For a nonprofit organization, such as most homeschool groups, nonprofit corporation status in your state brings similar protections of limited liability. If your main reason for seeking LLC structure is for limited liability, nonprofit incorporation in your state is the easier option.

Carol Topp, CPA

I am not an attorney, nor am I offering legal advice. I recommend that you seek legal counsel if you have additional questions or pursue Limited Liability Company status.

HomeschoolCPA’s most important blog posts

There are my most important blog posts.

I refer homeschool leaders to these blog posts most frequently.

These are keepers!

Print them put and share them with your homeschool leader.

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

We’re not 501c3 and don’t want to be!

Do not use individual fund raising accounts

Are Homeschool Support Groups Automatically Tax Exempt?

What business structure and tax forms are needed for a new homeschool co-op?

Carol Topp, CPA

What tax forms do I file for a homeschool co-op?

photo credit: stevendepolo

Carol’s book has been so helpful in getting our co-op organized. We have determined we are going to file Articles with our state and create by-laws and set ourselves up for a non profit corporation. With our fundraising and dues, we never bring in more than  $5,000. We probably have around 50-60 families returning this year. We are 100% volunteer based for our fundraising (silent auctions, garage sale.)
Come tax time, do we file with the IRS (like I do for our household every year?) For example, do we use turbo tax and file for our co-op? And if we have let’s say, $1,000 left at the end of the year, is that taxable? We do not want to zero out our account as it is nice to have a cushion for various reasons.

Lisa

Lisa,

Good questions!

Q: Come tax time, do we  file with the IRS (like I do for our household every year?) For example, do we  use turbo tax and file for our co-op?

A: Nope. This is a nonprofit organization, not part of your family/individual income, and not a for-profit business, either. Don’t use TurboTax. Please! (we tax preparers are not crazy about TT in general)

Technically, you would file a corporate tax return (Form 1120), but I would not recommend doing that.

Since your group qualifies as an automatic 501(c)(3) tax exempt organization (under $5,000 gross annual income), you could file a Form 990N. It’s an online form of only 5 questions. You may have to call and register with the IRS first, since you are not in their database. But many small nonprofits do not file the Form 990N at all.

(If you make more than $5,000 gross annual income, you must apply for tax exempt status and then will file the Form 990N or the Form 990EZ or the full 990 depending on the gross income of your organization. If your nonprofit has gross income of $50,000 or less, you file the Form 990N. That covers 99% of all homeschool organizations.  So the paperwork is quite small and easy to deal with.)

The IRS expects nonprofit corporations to file for tax exempt status with in 27 months of formation (the date of your nonprofit incorporation status from your state). So you have about 2 years to run your program before you have to file for tax exempt status. In the meantime, you can file Form 990N each year.

Q: And if we have let’s say, $1,000 left at the end of the year, is that taxable?
A: Taxable, unless you qualify for tax exempt status (either automatically or by application).
Q:We do not want to zero out our account as it is nice to have a cushion for various reasons.
A: Yes, that the reason why groups want tax exempt status. To reserve their surplus for future use. It’s a wonderful blessing in the USA that our gov’t allows charitable, religious and educational organizations to exist tax free. Not every country allows that!

Hope that helps!

Carol Topp, CPA

P.S. I’m glad my books were helpful. I have just updated my book on  501(c)(3) tax exempt status for homeschool groups. It’s called  The IRS and Your Homeschool Organization and covers all this information in greater detail. Read about it here.

Does the IRS Form 990N apply to my group?

Hi Carol,
Thanks so much for all your help in getting our Christian Homeschool Network up and running.  Things are going well so far. My husband brought a card he saw at the post office and handed it to me thinking it might apply to our group. The same basic info is on this web site: http://www.irs.gov/charities/article/0,,id=169250,00.html

It is about a new filing requirement for small tax exempt organizations.Does this apply to us? I was unsure if this was just for 501 C 3 organizations.
Thanks, Carol
Sharon W

Sharon,
The new IRS ePostcard (Form 990N) notification is for 501(c)(3) organizations. The IRS is trying to clean up its database by using this short electronic postcard. They hope to find any “dead” nonprofits that are no longer in operation. They are also looking for small nonprofits that have “grown up” to the $25,000 (now $50,000) gross revenues per year and should be filing a 990EZ or 990 Form annually.  The ePostcard is a way for small nonprofits to acknowledge that they are still under the $25,000 (nor $50,000) annual revenue threshold for filing the 990.

I recommend that you consider 501(c)(3) status ASAP.  The IRS expects nonprofits to file for 501(c)(3) tax exempt status with in 27 months of formation (incorporation as a nonprofit).  Your nonprofit incorporation date was May 27, 2008, so you have until August 2010 to apply.  Otherwise, the IRS requests an explanation of why tax exempt status was not filed earlier and tax exemption is granted to the date of filing, not back to the date of formation.  This could mean that a nonprofit might owe back income tax for the period that they were not tax exempt.

If your gross revenues stay under $5,000 a year, you are granted an exception from filing the paperwork for 501c3 status. If gross revenues get to be over $5,000 a year, your group should file for 501(c)(3) tax exempt status or pay corporate income tax on any surplus (i.e. profit).

In a nutshell, a small nonprofit has three choices:
1. Stay under $5,000 gross revenues per year
2. File for 501(c)(3) tax exempt status
3. Pay corporate income tax on any annual surplus.

I hope that helps,

Carol Topp, CPA

Update as of August 2010:

The IRS is now asking all nonprofit organizations to begin filing the Form 990N , even if they have not yet applied for tax exempt status. Here is what the IRS states on their website http://www.irs.gov/charities/article/0,,id=156389,00.html

Tax Law Compliance Before Exempt Status Is Recognized

An organization that claims tax-exempt status under section 501(a), but has not yet received an IRS letter recognizing exempt status, is generally required to file an annual exempt organization return.

The annual return is either Form 990, 990EZ or the new electronic postcard Form 990N.

The difficulty in filing the Form 990N if you have not yet received 501(c)(3) tax exempt status is that your organization is not in the IRS system. You’ll have to call the IRS and get entered into their system before you can file your 990N online.

Any wonder why many small nonprofits are not filing the 990N prior to being officially tax exempt?

Carol Topp, CPA

Does a nonprofit need to file any tax returns before they apply for tax exempt status?

I was advising a small homeschool organization about applying for tax exempt status and explained that they had 27 months after their date of formation to file an application with the IRS.

Hi Carol,

I just read this and was concerned that I would need to file something during the 27 months time frame.  Please explain if possible.
http://www.irs.gov/charities/article/0,,id=156389,00.html

Teri

Teri,

The link to the IRS website concerns IRS requirements before you apply for tax exempt status. The link above states this (in part)

Tax Law Compliance Before Exempt Status Is Recognized

An organization that claims tax-exempt status under section 501(a), but has not yet received an IRS letter recognizing exempt status, is generally required to file an annual exempt organization return.

This is a fairly new requirement from the IRS. I used to tell nonprofit organizations that if they had not yet applied for 501c3 status, they did not have to file the Form 990. It came to my attention only a week ago that the IRS wants Form 990 from all nonprofits.

Fortunately, the form your organization (and all small nonprofits with annual gross revenues of less than $50,000) would need to file is the 990N, an electronic postcard that asks about 5 questions: Name and address of organization, the principle officer’s name and check a box that your annual gross revenues are under $25,000. It is very short and would take less than 5 minutes once a year.

Here’s a blog post that answers your question. http://homeschoolcpa.com/does-new-irs-990n-apply/

I hope that helps.

Carol Topp, CPA

Reminder: Free webinar The IRS and Your Homeschool Organization is this Thursday

Reminder:

My webinar is this Thursday, Oct 27, 2011 at 8 pm ET

Free webinar: The IRS and Your Homeschool Organization

 

 

 

Paying teachers in a homeschool co-op is a sticky situation!

Amy asks a common question: paying teachers at a homeschool co-op

For the past several years, our group has spent more (thousands more) than we have charged our members. We’re not technically “in the red” because of more prosperous years in the past. The reason   we are spending so much money is that over 90% of our income goes to paying our parent-teachers ($15-$20/hour)! The rest of the money goes toward classroom supplies. I am sure that most parents are unaware of how the finances of this group are managed.

Have you heard of groups paying their teacher/parents? What do I need to understand about the various homeschool support and cooperative group structures that I don’t currently comprehend?  Help!
-Amy

Amy,

Your situation sounds very familiar to me. I too was treasurer of my 40 family co-op and found that 75% of our budget was going to pay 4 paid teachers. The other 20 teachers were volunteer parents, myself included. Not all the families were using a paid teacher, but all were chipping in to pay for them. We also were finding that people were offering to teach because they thought they could get paid. We were losing our cooperative spirit. I knew something needed to change.

About the same time I was helping another homeschool group with some independent contractor/employee issues with the IRS. I wrote about it on my blog. You can read about it here:

Is your homeschool group’s hired teacher really an employee?

Update on Independent Contractors.

We decided to follow IRS guidelines and have the parents pay the teachers directly, like you would pay a piano teacher. The co-op was no longer paying the teachers.

I did some number crunching and found that we could lower our co-op fee from $150/family/semester to $75/family/semester. In addition we offered a $50 discount for teaching a class.

What happened was amazing! Wonderful, talented homeschooling mothers volunteered to teach a class! We had more volunteers than we could accommodate. REALLY! If a mother volunteers to teach a class she only pays $25/semester for her family to attend 3 hours of classes at our co-op. If her child attends one of our paid classes (there are only 3, guitar, art and Spanish) then she pays the teacher directly. For example, I pay $65/semester for my daughter to take an art class. I think the teacher is worth it.

This got us out of the sticky employee/IC situation with the IRS. I’m writing fewer checks. It made my job as treasurer a lot easier and no 1099MISC forms at the end of the year. No one complained. The spirit of cooperation has returned. YEAH!  I’ll also add that we let the volunteers decide what they wish to teach. If we cannot find a Spanish volunteer, no Spanish class is offered. If enough parents want Spanish we may see if a teacher can come to the co-op. We give her a room and she collects her fees from the parents directly.

I wrote an ebook Paying Workers in a Homeschool Organization. For only $3.00, I think you’ll find it very helpful. Order here

The issue of paying teachers as employees is too important to ignore.

Your group may have to consider some big changes.

Good Luck!!

Carol Topp, CPA

 

 

 

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

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

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