Can board members be responsible for a nonprofit’s employer taxes?

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If the IRS rules that a 501c3 nonprofit organization has misclassified its workers as independent contractors instead of employees, and the back taxes, fines, and/or penalties exceed the resources of the organization, what happens? Is it possible that the membership of the organization and/or members of the board could be financially responsible?

Lisa

Lisa,

Yes, the board members can be held personally responsible for employment taxes owed by a nonprofit organization. That’s why many nonprofits with employees have Director and Officers insurance.

Here’s a website that discusses paying employer taxes. (Employer taxes are slightly different from what you asked, but its still a tax/fine imposed by the IRS or state govt).

https://nonprofitquarterly.org/governancevoice/5516-not-paying-your-taxes-your-board-could-be-personally-liable.html

The author, a nonprofit attorney,  states

“If a nonprofit fails to pay taxes, the IRS may go after individual board members and executives to repay the money.…The IRS doesn’t want to discourage service on the boards of charitable organizations. But the IRS wants its money and will get it any way it can and from whomever it can prove was a responsible person.

Board members and senior executives of any charitable organization should be vigilant in ensuring that an organization is current in all its payment obligations to taxing authorities.”

Carol Topp, CPA

Insurance and fundraising for a homeschool team

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Carol,
Our homeschool group has an engineering class that has become a finalist team in an invention competition at MIT.  The teacher needed us as a non-profit organization to “back” or “sponsor” the team. All that means is we needed to support the team (not financially, but letter of recommendation).

Now that we have become finalists it is very possible we will be selected to travel to MIT for the competition.  Our concern is liability.  Is there a way for us to continue to support the team without a worry about insurance for the travel?  Can we have parents sign a waiver of liability?
The teacher has agreed to fund raise but NOT have any of the money go through our accounting, since we need to limit our income due to the 5013c requirements.  Our income needs to stay below a certain amount. We are a large coop and so our dues add up quickly.
Mary S
Mary,
Congratulations on your Engineering teams success!

I’m not an insurance or risk expert, so I am not really sure how “sponsoring” an academic team makes your organization responsible if there is an accident while traveling. Yes, have parents sign a waiver, but that is not guarantee that you’re free of responsibility. It just reminds parents that they should be carrying medical insurance on their children.

  • Act in a responsible, safe manner and you’ll lessen the risk.
  • Ask for drivers licenses from the drivers.
  • Ask if they have speeding tickets, their own insurance, etc.
  • Have chaperones at all times, never let the kids go off by themselves, etc.

I bet you can search the internet and find a waiver and maybe even rules to follow. Ask the competition for samples of waivers or contact the other groups coming and ask for their policies.

Does your co-op have liability insurance? You should call your insurance agent and talk to him/her. They may say your group is covered under your current policy or write you a special event rider.

Limits on nonprofit income

The dollar limits the IRS imposes are for organizations that have not yet applied for 501c3 status (if gross income is under $5,000 a year, a group can be considered tax exempt without filing the application form with the IRS).

If you already have 501c3 status (and have an IRS letter to prove it), you are not limited in the dollar amount you can raise. For example, the Red Cross raises millions each year to help  in disasters.

The IRS does have dollar thresholds when filing the annual Form 990. For example if your gross income is under $50,000 you file the simple on-line 990-N form once a year. If your gross income is $50,000-$200,000, you file the Form 990-EZ. The gross income determines what form you file, but does not limit the amount you can raise.

Check with whoever told you that you had to stay under a certain dollar amount. I think he/she may be confused.

Carol Topp, CPA

Paying your homeschool graduation speaker

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We provide our homeschool groups members with a graduation ceremony.  The group assists in planning the event and contributes $500 toward their expenses.  Some of the expenses were “love offerings” given to volunteers who sang, played piano, and created slide shows.  This was a challenge when it came to gathering receipts since it was not contract labor or services provided.
How should we handle future “love offerings” or “gifts” and meet requirements of the government for keeping receipts of expenses?  Because our record keeping has been nonexistent in the past, I want to make sure I am setting things up correctly and doing things within the confines of the law.
Thank you,
Trisha in Texas
Tricia,
I was treasurer for my homeschool group’s graduation ceremony for a few years and we did the same thing: gave “gifts” or speaker honorariums. We also did not have a receipt to prove the expense. The check I wrote to the speaker or singer was our only record of the expense.If you pay someone more than $600 in a year for their services such as the speaker, the singer, etc. then you should give them a 1099MISC at the end of the year (and a copy goes to the IRS).

If you are reimbursing a parent for decorations, etc. then you should have receipts from him/her. It’s not a personal service, but a volunteer reimbursement and no 1099MISC is sent to the volunteer.

Carol Topp, CPA

 

Calendar of Board Topics for Homeschool Groups

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This blog post from Nonprofit Law Blog had a great idea: Create a calendar of topics your board should discuss every year.

I modified their ideas a bit for typical homeschool organizations and came up with this list of topics for your board to discuss each month:

  1. Welcome new board members and give them a history of your organization, its purpose, an understanding of their duties and a board binder. Read over the bylaws and review your mission and purpose statement.
  2. Discuss new programs and activities.
  3. Decide on discounts and appreciation gifts for volunteers.
  4. Go over best practices to avoid fraud. Read them here. Implement changes as needed.
  5. Discuss fundraising techniques.
  6. Authorize committees, recruit members and delegate duties to them.
  7. Review your conflict resolution policy. How do you solve conflicts. Read The Peacemaker.
  8. Review your risk areas, safety policies and insurance coverage.
  9. Evaluate any paid workers, independent contractor agreements, and employment practices.
  10. Recruit, nominate and elect new board members.
  11. Set a budget near the end of the year for the next year.
  12. One month after end of fiscal year file IRS form 990/990-EZ or 990-N and any state forms.

As you can see, I have links to articles and blog posts on most of these topics.

And my books,

  • Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out
  • The IRS and Your Homeschool Organization.
  • Money Management in a Homeschool Organization

have many issues for your board to discuss as well.

Carol Topp, CPA

 

 

Can a homeschool group give perks to board members?

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Can a member of the board (of our homeschool group) be given free tuition as a perk? Or could this be a conflict of interest?

Ashley

 

Ashley,

It is a conflict of interest if the board votes itself tuition discounts. A nonprofit board member has a duty of loyalty to the organization above themselves. So if a board votes themselves a tuition discount, their loyalty comes into conflict with their personal benefit.

If only one member receives a discount, the rest of the board could vote to give that person a discount in appreciation for her volunteer efforts. That member benefiting should not be in the room during the discussion on discounts and they should not be allowed a vote.

If the entire board wants a discount for each member, then perhaps the bylaws should state that. If the bylaws are amended, I’d recommend  a vote be put to the membership at large approving the discounts as a “perk” of serving on the board.

I’d also recommend a conflict of interest policy. See samples here:http://homeschoolcpa.com/leader-tools/sample-documents/

Carol Topp, CPA

Can a homeschool group give discounts to a family in need?

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Carol,
Our homeschool group is a 501c3 organization. A parent member of our group recently approached me and asked if we could start a scholarship program. (This would not be a college scholarship program.) The parent’s hope is that a parent (or any individual) could give a donation to the organization to be used for scholarships for families who were facing financial hardship to attend our classes.
The scholarship would only be used to reduce a needy family’s tuition at our co-op. The parent that asked this question was hoping to get a tax deduction for his gift. I know that there could potentially be an issue with private inurement* for the families receiving a “scholarship” in this situation.
I would greatly appreciate your input. I am happy to schedule a phone consult with you.
Thanks!
Sharon in PA
Sharon,
What your member is proposing is a type of benevolent fund.
I don’t like the use of the word “scholarship” because, to the IRS, “scholarship” means payments on behalf of a student to a college.
I wrote a blog post about it: http://homeschoolcpa.com/do-not-call-a-fee-discount-a-scholarship/
Granting a tuition discount to a needy family is not inurement* if you put into practice a few safeguards such as:

  • the board, or a committee decides on the criteria to grant a tuition discount for a hardship (consider creating a policy)
  • the family receiving the benevolent discount has no vote or decision in granting the discount
  • the donation is not “ear marked” for a specific family. The board gets to decide who gets a benevolent discount, not the donor.

*Inurement is when the earnings of the organization are used for the advantage of a specific individual instead of the purpose of the organization. Inurement is forbidden for 501(c)(3) organizations.

I hope that helps,

Carol Topp, CPA

How the IRS sees homeschool co-ops (podcast)

IRS and homeschool groups

In this episode of the Dollars and Sense Show podcast, host Carol Topp continues her topic “Who’s Afraid of the IRS?” and discusses how the IRS sees homeschool co-ops and 501(c)(3) tax exempt status.

Listen to the podcast

Listen to the first part of this presentation where Carol discussed homeschool support groups and IRS 501(c)(7) tax exempt status as a Social Club.

Get a copy of the handout.

Carol also mentioned the article “Do You Know About IRS Required Filings for Homeschool Organizations?” Get it here.

The IRS and Your Homeschool Organization

Carol’s book, The IRS and Your Homeschool Organization, is available here.

 

Homeschool group answers IRS questions

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Many homeschool organizations are finding that the new IRS Form 1023-EZ makes applying for 501(c)(3) tax status quite easy (compared to the full  26-page Form 1023!)

But, unfortunately, one homeschool group, Crossroads Co-op from Maryland, found their application held up because the IRS wanted more information. Specifically, the IRS asked for:

  1. An original copy of their organizing document. Fortunately Crossroads had Articles of Association complete with the IRS required language all ready to go!
  2. A detailed description of their activities including who, where, when, fees, and time and resources
  3. Actual revenues and expenses for 3 years.

I helped Crossroads write a reply to the IRS and in only 5 days, their 501(c)(3) status was granted!

We don’t think that the IRS was targeting Crossroads Co-op or homeschool groups; we think Crossroads was just randomly selected by the IRS to provide details.

The important lesson learned is that nonprofit organizations need to have their financial information and organizing documents ready to send into the IRS when asked.

Applying for 501(c)(3) tax exempt status is more than just filling out the Form 1023-EZ online. It involves properly structuring your nonprofit.

Crossroads had done that, so they were able to answer all the IRS questions and get their tax exempt determination letter in a timely manner.

If you need help applying for tax exempt status for your nonprofit organization, contact me.

 

Carol Topp, CPA

 

How can the IRS revoke my tax exempt status when I never applied for it?

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Carol,
About 15 years ago a couple of moms started a homeschool summer sports group. About 8 years ago, two leaders opened a bank account. The bank set them up with a “Club” account and secured a federal ID number (EIN) for the club. We never applied to the IRS for anything. We never filed any annual reports (the Form 990-N).

Now from reading your website and our emails, it sounds like our tax exempt status was revoked and we need to get it back.

How can something we never had (501c7 Social Club status) be revoked? 

Your help in clarifying this is appreciated, so we know how to move forward.

Lisa

 

Lisa,

I know this is confusing.

Your sports group is a recreational club that fits the IRS definition of 501(c)(7) social club.

501(c)(7) Social Clubs can “self declare” their tax exempt status without officially applying. Technically, you “self-declared” your tax exempt status when you said you “never applied to the IRS for anything.”

Since 2007, the IRS has required all tax exempt organizations, even those that self-declared their tax exempt status, to file the annual Form 990N.  Read more here: http://homeschoolcpa.com/irs-form-990n-faq/

Your organization failed to file the 990-N for three years the and IRS has revoked your “self declared” tax exempt status.

Now you need to file the paperwork (Form 1024) to get back your tax exempt status that you didn’t need to apply for in the first place!

Crazy? YES!
Frustrating? YES!

A lot of small organizations have learned that their tax exempt status had been revoked and they didn’t even know about it!

I don’t think the IRS thought this through. I wish they had not revoked the status of 501(c)(7)s, but they did. I also wish they would allow a simple phone call to get reinstated instead of filing the paperwork and paying the IRS $400 fee.

Here’s the IRS webpage explaining how to get your tax exempt status reinstated. They offer 4 methods.

How to Have Your Tax Exempt Status Reinstated

If you find reading the IRS webpage a bit confusing, feel free to contact me and we can set up a personal consultation by phone to discuss your options.

Carol Topp, CPA

 

Meet Carol Topp, the HomeschoolCPA, in Michigan

INCH postcard

I’m headed to Michigan to speak at the INCH homeschool conference in Lansing May 15-16, 2015.

I’ll be speaking on several topics including

  • micro business for teens
  • career exploration
  • starting a homeschool co-op
  • raising adults
  • record keeping in high school
  • teaching kids about managing money

Can’t make it to any of these conventions? Listen to my podcast, The Dollars and Sense Show.

Recent podcasts include:

  • We’re Not Raising Children, We’re Raising Grown Ups
  • Warnings Against Frugal Homeschooling
  • Has Your Homeschool Group Lost Its Tax Exempt Status