HomeschoolCPA.com » Paying workers

IRS Provides Template For Employee vs. Contractor

Carol Topp — Tue, 15 May 2012 18:14:41 +0000

From Forbes come some helpful information on determining if your homeschool co-op teacher is an employee of independent contractor.

Image via conseiller.ca

Determining who is a true independent contractor and who is really an employee involves more than labels. The IRS, Department of Labor, state labor and employment boards, unemployment insurance and worker’s compensation authorities all investigate this. It also comes up in private lawsuits over benefits, liability, and more. See Winning Independent Contractor Battles.

The IRS recently issued a template focused on evaluating your own status. In IRS Publication 1779, the IRS looks at three areas: behavioral control; financial control; and the relationship of the parties to determine worker classification.

Behavioral Control. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done—as long as the employer has the right to direct and control the work.

Instructions. If you receive extensive instructions on how work is to be done, this suggests you are an employee. Instructions can cover a wide range of topics, such as:

1. How, when, or where to do the work;

2. What tools or equipment to use;

3. What assistants to hire to help with the work; and

4. Where to purchase supplies and services.

If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

Training. If the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way

Financial Control. These facts show whether there is a right to direct or control the business part of the work. Consider:

Significant Investment. If you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
Expenses. If you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
Opportunity for Profit or Loss. If you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

Relationship of the Parties. These facts illustrate how the business and the worker their relationship. For example:

Employee Benefits. If you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
Written Contracts. A written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts. See Ten Tips for Drafting Independent Contractor Agreements.

Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Will getting an EIN put us on the IRS radar?

Carol Topp — Mon, 02 Apr 2012 12:12:02 +0000

Usually the first contact a homeschool organization has with the IRS is getting an Employer Identification Number (EIN). Most banks now request an EIN when a group opens a checking account. One group in Virginia is doing things right by getting a checking account for their homeschool co-op instead of using a personal account, but they wonder if this will mean more contact with the IRS.

Hi Carol,

I am new to an existing homeschool co-op in VA. Tomorrow morning we are meeting to discuss our options as it relates to becoming a more formal organization. I want to be able to advise them as to their options on this.

This co-op is more then 12-15 years old, we do not accept donations or need to, so far we have been handling the money through someone’s personal bank account, we receive fees from students and then pay teachers and reimburse them for materials, generally we break even each year (or can if we need to), there are regular Board meetings, I do not know if they have bylaws or take minutes but I do know they have a mission statement. The bottom line is that we want to be able to have a business checking account.

Can we get an EIN in order to open a checking account in our co-op name without incorporating and without having a state or federal annual filing requirement? I seem to remember that once you get an EIN (that I think is required for a business bank account), you are on the radar screen with the IRS and will need to file some sort of return.

Thanks so much

Nancy in VA

Nancy,

Yes, you can get an EIN for banking purposes, but not have any other dealings with your state or the IRS. Many homeschool groups operate for years with no contact from their state or the IRS.
You will deal with the IRS if you become a 501(c)(3) tax exempt organization or pay workers.

BTW, I will caution you that if you are paying teachers, then you do have some reporting to the IRS and your state government. You will have to pay payroll tax (Social Security and Medicare) and file a W-2 if they are employees or file a 1099MISC if they are independent contractors. You should read this blog entry: Paying co-op teachers is a sticky issue

Best of success to you!

Carol Topp, CPA

What tax forms does a homeschool co-op teacher file?

Carol Topp — Sat, 21 Jan 2012 13:12:00 +0000

Hi Carol.

Thank you for all the help you have already given our homeschool community!

There is a homeschool co-op that allows teachers to charge the parents $0-$45 per student. As a teacher, how would I report any net income on my income tax return? (payments are made directly to the teacher).

Best regards,

Lynn (New York)

Lynn,

You report all your income and expenses on a Schedule C or the shorter form Schedule C-EZ as part of your federal form 1040.
The net amount is carried onto page one of your 1040 and added to your other income from W-2s etc.

If you made more than $400 in net income in 2011, you will also have to fill in a Schedule SE and pay Self-employment tax (its Social Security and Medicare taxes for self-employed people).

Hope that helps!

Carol Topp, CPA

Homeschool leaders: If you hired and paid a teacher in 2011 you may need to filing some paperwork with the IRS! The deadline is January 31, 2012 to give your workers a 1099MISC or W-2.

Find out what to do in my ebook Paying Workers in a Homeschool Organization.

Only $3.00.

Did your homeschool group pay a worker in 2011?

Carol Topp — Sat, 14 Jan 2012 13:46:38 +0000

Did your homeschool group pay any workers, administrators, or teachers in 2011?

Don’t forget the laws about reporting payments to employees or Independent Contractors!

Don’t know the laws?

Listen to my (free) podcast Paying Workers in a Homeschool Organization

purchase my ebook, Paying Workers in a Homeschool Organization

Now available in pdf or Kindle format.

IRS pushes to reclassify independent contractors as employees

Carol Topp — Wed, 21 Dec 2011 13:06:55 +0000

A recent article at CFO.com discusses the new regulations the IRS and several sates have passed to push employers to reclassify independent contractors as employees.

A Loss of Independents?

Regulators have rewritten the rules regarding the use of independent contractors, forcing companies to make hard choices — and possibly pay heavy fines.

by David M. Katz

As companies make greater use of independent contractors, the Internal Revenue Service is pushing to get many of those self-employed workers reclassified as employees.

For many companies, particularly small and midsize firms, the ability to classify certain workers as independent contractors provides what they regard as essential flexibility.

If such reclassification were widely enforced, companies would have to start withholding federal income, Social Security, Medicare, and unemployment taxes from freelancers’ wages — not to mention possible payment of fees and penalties for previous misclassifications. Further, such firms would have to start paying for the same employee benefits and workers’ compensation that they currently do for full-time employees.

Carrot and Stick
How likely is it that such a scenario would occur on a broad scale? Not very — especially because the IRS, the Department of Labor, and the states themselves don’t have the staff needed to provide such enforcement. Yet even as the economy grows more reliant on temporary labor, regulators are becoming increasingly vigilant about getting employers to classify previously mislabeled workers.

The IRS, for example, has lately been wielding both carrot and stick. This fall the service introduced a voluntary program that might enable some employers to shed certain tax liabilities by dubbing certain independent contractors as employees. But that program came on the heels of a year-and-a-half-long crackdown by IRS agents on potential misclassifications, according to Kathy Mort, a managing director in PwC’s Washington, D.C., national tax services office.

Faced with burgeoning federal and state budget deficits, regulators see a vast pool of potential back taxes, fees, and penalties to be gleaned from the detection of employee-classification errors. Currently, the IRS estimates that 15% of all employers have misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated annual revenue loss of $3.4 billion in 2010 dollars.

While many companies err on the side of caution and forgo the use of independent contractors, for those employers “that have [long assumed] that a large group of contractors is not going to be looked at, there’s a more significant risk than there ever was that someone — the DoL, the IRS, or state agencies — is going to look at them,” Mort says.

In September, Secretary of Labor Hilda Solis seemed to ratchet up that risk when she hosted a ceremony in Washington to sign a memorandum of understanding with the IRS and representatives of seven states “to end the business practice of misclassifying employees in order to avoid providing employment protections.” (The states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington.)

Red the full article here.

What should your homeschol organizations do?

Read my blog posts on hiring workers here.
Buy my ebook Paying Workers in a Homeschool Organization. Only $3.oo
Discuss this issue with your board and take proper action to be legal.

Carol Topp, CPA

HomeschoolCPA’s most important blog posts

Carol Topp — Sun, 20 Nov 2011 20:46:52 +0000

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

No related posts.

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

Carol Topp — Sat, 03 Sep 2011 10:10:33 +0000

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?

Carol Topp — Tue, 30 Aug 2011 10:00:13 +0000

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:

1. They had all their paid teachers sign a Independent Contractor Agreement.
2. They did not control the content of the class, nor dictate to the teacher what curriculum she must use.
3. They offered no benefits to teachers.
4. They did not train their teachers.

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?

Carol Topp — Tue, 23 Aug 2011 10:00:52 +0000

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.

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

Paying Workers Ebook on Kindle!

Carol Topp — Wed, 08 Jun 2011 00:19:39 +0000

My ebook Paying Workers in a Homeschool Organizations is now available on the Kindle!

Here’s the link! http://www.amazon.com/dp/B0053YLYTO

The ebook is selling for $2.99.

Don’t have a Kindle? You can still read the book on your PC with the Get Kindle for PC download.

More of my books will be published in Kindle format later this summer.

Carol Topp, CPA