Can I avoid the expense of hiring employees by being a 501c3?

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I run a homeschool tutorial in Texas as my small business. My tutors should be classified as employees according to the IRS rules. Due to the expenses and paperwork involved with hiring employees, I would like to set up a 501(C)(3).

I would like to hire you to help me with the process of setting up our local group as a 501(c)(3). Can you help me begin the process of setting up as a 501(c)(3)?

B in Texas

Dear B,
You should understand that having 501(c)(3) tax exempt status does NOT change the employer or payroll taxes you would have to pay.

501(c)(3) tax exempt status only grants nonprofit organizations tax exemption from federal income tax, not the payroll taxes. In other words, nonprofit tax exempt organizations still have to pay payroll taxes such as SS/Medicare, workers comp, unemployment insurance premiums.

Additionally, forming your business as a nonprofit organization means that you are no longer in control of the organization, nor does the money belong to you. The organization must be run by a board. The board can hire you as an employee, but they can also fire you.

Because you are converting a for-profit business to a nonprofit organization, you are not eligible to use the IRS’s short online Form 1023-EZ application form. Instead you will have to use the longer Form 1023 to apply for 501(c)(3) tax exempt status.

So you need to carefully consider your motives in forming a nonprofit, tax exempt organization. It should be done for reasons other than the expense and paperwork of hiring employees, because that burden will still exist as a 501(c)(3) tax exempt nonprofit organization.

Need help understanding the rules regarding paying workers in your homeschool organization? My book Paying Workers in a Homeschool Organization will explain the difference between employees and Independent Contractors and the necessary forms to file.

Carol Topp, CPA

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How the IRS defines a school

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I’ve found your website very helpful.  We are working on starting a “school” which will initially offer a 3 to 5-day program for 5-10 year olds who are being homeshooled.  We would like to obtain 501c3 status.  My understanding is we can call ourselves a school, but I’m wondering if homeschooling needs to be mentioned in the 1023 application or if it just causes complications.  Is it simpler to state that we offer 3 and 5 day programs for educational enrichment for kids aged 5-10 and leave it to the parents to address the homeschooling issue?  They notify the state they are homeschooling and follow the state regs on that.  We are located in Maine.  Thanks for any guidance, thoughts, or advice.

Chris in Maine

 

Chris,

I have helped over 75 homeschool organizations receive tax exempt status. I’ve had no difficulty using the word “homeschool” in the IRS application. I usually state that all families are legally homeschooling in their respective states.

You could call yourself a school, but the IRS has a pretty narrow definition of “school” and there is an additional form to fill out when applying for tax exempt status (Form 1023 Schedule B). Schools are ineligible to use the new, shorter Form 1023-EZ, as well.

The Form 1023 Schedule B requests information on your curriculum (list of courses, dates and times) and “evidence” that your teachers are “qualified” meaning state certifications or required training. They also request records of regular attendance, racial makeup of your student body, and a lease or deed, proving you have a regular place to meet. Take a look here http://www.irs.gov/pub/irs-pdf/i1023.pdf and scroll way down to page 18.

Most homeschool groups that use volunteer parents and vary the classes offered each year do not fit this IRS definition of  a school.

So they do not call themselves a school. They call themselves an “educational organization” or sometimes an “educational enrichment service.”

You asked if  “Is it simpler to state that we offer 3 and 5 day programs for educational enrichment for kids aged 5-10 and leave it to the parents to address the homeschooling issue?”
Well, as I said, I explain to the IRS that the program is for homeschooled students and, yes, the parents are responsible to be sure they are legally homeschooling.

I will review the Form 1023 application for 501c3 tax exempt status for organizations that prefer to fill out the application themselves. See details here: http://homeschoolcpa.com/services/501c3-tax-exempt-status/

 

IRS and Your Homeschool Org cover

My book The IRS and Your Homeschool Organization
explains the pros and cons of 501c3 status and offers tips to get through the application process quickly.

Carol Topp, CPA

 

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Checklist for homeschool co-op

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We are going through the process to create a non profit homeschool co-op and were wondering how much it would cost for you to review our paper work or how much it would cost for you to do and submit our paperwork.

Candace

Candace,

I have a listing of my fees here: http://homeschoolcpa.com/services/

My services vary depending on what you mean by “filing your paperwork.” There’s paperwork with your state and paperwork with the IRS. I can help with both types of filings.

Here’s a helpful checklist to keep it all straight!

Carol Topp, CPA

 


 

Candace’s question prompted me to update my Checklist for Homeschool Organizations Applying for Tax Exempt Status.

I know that forming a nonprofit organization and applying for tax exempt status can be confusing. There are just too many unfamiliar terms, IRS thresholds, steps to take and numbers!

This checklist will help you know the steps to take and the correct order.

If you need help at any step or want a personal consultation to discuss your unique situation, please contact me.

I am available to assist your homeschool organization every step of the way. Through my blog posts, books, podcast, and consultations, I try to make confusing IRS rules easy to understand. I have assisted over 80 organizations receive 501c tax exempt status.

Carol Topp 1200x1800

Carol Topp, CPA

HomeschoolCPA.com

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HomeschoolCPA increased my fees, but you’ll get more!

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I don’t do this often, but I recently increased some of my fees.

My popular phone consultation fee is the same at $60/hour.

My fee preparing the IRS Form 1023-EZ application for 501(c)(3) status for small organizations has increased from $150 to $250.

But starting July 1, 2016 the IRS fee for Form 1023-EZ drops from $400 to $275, so overall your total fee will be less than before. Gotta like that.

Additionally, I used to charge separately for reviewing your Articles of Incorporation  for compliance with the IRS 501(c)(3) rules. Now that will be included in the $250 fee.

And I will also include a letter explaining what your state filing requirements will be for your newly formed 501(c)(3) organization. I used to charge separately for that as well, but it’s now included.

So, your homeschool group can apply for 501(c)(3) status (or get reinstated if your tax exempt status was revoked because you failed to file the annual Form 990-Ns) for less money and get more services!

What’s not to like about that?

Helping homeschool leaders,

 

Carol Topp, CPA

HomeschoolCPA.com

 

 

 

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Adding religious purpose to bylaws and Articles

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Dear Carol

Our homeschool group is currently a 501(c)(3) association that was organized in 1986. Our articles of association were recently found and we find out that we are NOT a Christian group, even though many of us are Christian and we are recognized by the community as a Christian group.
Will switching from a secular to a Christian homeschool cause us to lose our funds in the back account or to cause any fee to be incurred by the IRS?

Becky W

Becky,
It is hard for me to advise you without seeing the Articles of Association or your 501(c)(3) application. If you have electronic copies and can sent them to me, it would be helpful.Your Articles of Association (or Articles of Incorporation) and your 501(c)(3) application define your group’s purpose.

Your bylaws and policy manual are where you you explain how you fulfill that purpose. For example, you might include a Statement of Faith in your bylaws, or a membership requirement that members need to be Christians, etc. It’s very simple to change bylaws. You simply get the board to vote  a change. Follow whatever your bylaws  say is needed to change the bylaws.

Nonprofit corporations that wish to add a religious purpose to their Articles of Incorporation, do that by amending the Articles of Incorporation with their secretary of state. These groups need a vote by the board (as outlined in their bylaws) to make changes to the Articles.

(In Becky’s case, her organization is an unincorporated association and is not required to file any Articles of Association or changes to the AoA with the state).

You asked: “Will switching from a secular to a Christian homeschool cause us to lose our funds in the back account or to cause any fee to be incurred by the IRS?You should not lose your funds, but your board needs to approve all changes to the bylaws and Articles of Association.

You could perhaps contact the IRS (via a letter) if you wish to add to the scope of your 501c3 tax exempt application (i.e add that you have a religious purpose).

If you can dig out your 501c3 application (Form 1023) and read what you originally told the IRS, it would be helpful. The religious purpose may already be  mentioned.

I hope that helps.

 Carol Topp, CPA

IRS lowers fees on Form 1023-EZ

 

 PRICE CUT:  $400   $275

 

The IRS recently announced in Revenue Procedure 2016-32, dated May 31, 2016 that it will be decreasing the Form 1023-EZ user fee from $400 to $275.

The fee reduction will be effective July 1, 2016.

If you are about to file, waiting until after July 1 could save you $125.

The Form 1023-EZ in an online application for 501(c)(3) tax exempt status. Organizations must have less than $50,000 in annual gross revenues and meet other eligibility tests to use the Form 1023-EZ.

 

If you need assistance in determining your homeschool organization’s eligibility for use the Form 0123-EZ or assistance in completing the form, please contact me. I’ve assisted more than 20 homeschool organizations apply for 501c3 tax exempt status using the Form 1023-EZ.

Carol Topp, CPA

Trouble filing your 990-N?

Having Trouble Filing 990-Ns?

Some non-profit organizations have reported trouble trying to file the 990-N ePostcard using the new IRS system.

If you’re using Google Chrome or Firefox, try using Internet Explorer (IE) to see if that helps.  I know that IE is old-fashioned, but it seems to work.

By the way, if your organization operates on a calendar year (with your year ending December 31), then you Form 990-N is typically due May 15. Since May 15 is a Sunday the IRS has extended the due date for the 990-N to Monday, May 16, 2016.

 

Carol Topp, CPA

 

Homeschool group not open to the public. Is that allowed?

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On your chart comparing the two types of tax-exempt status for homeschool organizations, under 501(c)(3),  it says membership is open to the public. However, many homeschool groups have membership qualifications. Some require members agree with a Statement of Faith or or not participate in a public-school-at-home program.
Thanks for your insights.

Dorothy

Dorothy,
You asked about membership in your homeschool group being open to the public. You do not have to throw open the doors to your homeschool programs and let everyone in. That could be logistically difficult and it could threaten the safety of the children participating in your programs.

I should clarify that 501c3 groups serve a public good-the education of children- but they may limit membership to their group.

Also, when the IRS determines a group is a public charity (and educational organizations are considered public charities), they mean the organization is funded by the public, unlike a private foundation which is funded by an individual or a family.

Remember, we, as Americans, have the freedom to assemble and that means we can determine who can join our groups and who cannot join. So membership requirements are allowed.

Sorry if that was not more clear.

Carol Topp, CPA

New website for filing IRS Annual ePostcard Form 990-N

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The Internal Revenue Service (IRS) is changing the website to file the Form 990-N. The Form 990-N used to be hosted by the Urban Institute, but starting February 29, 2016, the IRS will host the Form 990-N submission website.

The new website is www.IRS.gov/990N

The Form 990-N is a short,  annual filing that small (those normally with annual gross receipts up to $50,000) tax-exempt organizations file in place of the lengthier Form 990-EZ or Form 990. In order to file the Form 990-N, all nonprofits will be required to complete a one-time registration and file Form 990-N submissions through the IRS’s website at www.IRS.gov/990N.

Who must file
Most small tax-exempt organizations whose annual gross receipts are normally $50,000 or less can satisfy their annual reporting requirement by electronically submitting Form 990-N if they choose not to file Form 990 or Form 990-EZ instead.

Exceptions to this requirement include:

Form 990-N is easy to complete. You’ll need only eight items of basic information about your organization.

Homeschool leader collecting donations without tax exempt status.

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Our homeschool group leader just opened a Paypal account and has begun asking for donations. This seems a little weird and as though we need to be a nonprofit if money is collected from members. I referred her to your website, but she believes we have nothing to worry about. Is this true? Should we be a nonprofit if money is involved? How can I help her understand the ramifications of not using your resources?
Randi

Randi,

Thank you for contacting me.

Oh dear, your leader thinks she has nothing to worry about! It’s just not that way anymore!

Whenever an organization collects money from either member dues or donations, the leaders have a fiduciary responsibility for managing that money properly. If they do not manage the money properly or get organized properly with the IRS, the leaders can be held personally liable for any mistakes.

This blog posts explains the fiduciary responsibility of leaders: http://homeschoolcpa.com/what-are-the-legal-responsibilities-of-homeschool-leaders/

An organization cannot accept tax deductible donations unless they have 501(c)(3) tax exempt status from the IRS. Most homeschool groups collect membership dues, but those are not “donations” and they should not be called donations.

How can you help your leader be more responsible? Explain that if your group is not properly organized then the money she is accepting will be seen as her taxable income by the IRS and she will have to pay taxes on it!

To get properly organized start by reading a few of my blog posts and articles.

This quick video may help as well: https://youtu.be/FLvfw23z7M0

Good Luck!

Carol Topp, CPA
HomeschoolCPA.com