W-2s and tax filings for homeschool co-op teachers

A homeschool co-op treasurer asks about the tax filings for paid teachers:

Hi,
I am the treasurer for a new co-op we have setup this summer, and will be starting our class days in the beginning of September. I am looking to get some advice from you on how we need to define our mentors (teachers), and if we need to give them W-2’s, and if we need to with-hold taxes, etc.

We will have about 12 mentors, each teaching a class of 8-9 kids on Fridays. We follow a curriculum that the parents buy on their own. We try to keep the cost very low, so the mentors, which are all mom’s of kids in the program get paid $800 for the year.

We have already been setup as a South Dakota non-profit corporation, and would like to work towards a 501c3 in the future, but not this year. Our main issue right now is we need to move forward with setting up a checking account, which requires an EIN, and to get that we need to know if we have employees. Also, I want to determine how I need to be paying them, as far as tax with-holdings, etc.

Thank you,
Doug M, SD

Doug,
Congratulations on your new co-op. It sounds as if you are off to an great start! You should be very proud of all that you have accomplished.

As you described the co-op’s relationship with the paid mentors, they should all be classified as employees. Your co-op exercises quite a bit of control by telling them what curriculum to use, so they are not independent contractors.

IRS Publication 15 Employers Tax Guide has a nice checklist of forms and dates that you’ll need to file:

You should collect a Form W-4 from each employee for their information and federal tax withholding To make your job simpler you can tell your employees that the co-op will not withhold federal or state income tax since their wages are relatively small. The W-4 is kept by you and not mailed into the IRS.

The co-op will be responsible for paying federal employer taxes (Social Security and Medicare) and filing quarterly statements with the IRS (called a Form 941). See IRS Publication 15

If you have 501(c)(3) tax exempt status, your co-op would be exempt from Federal Unemployment tax. But the tax is rather small at 0.8% (See Form 940 and its Instructions)

At the end of the year you will issue a W-2 to each employee and mail copies of the W-2 and W-3 to the Social Security Administration. See Pub 15 (above) for details.

South Dakota may have unemployment tax requirements and workers compensation payments. Contact your state’s department of taxation or employment for details. I’m no expert on SD taxes, but here is a place to start: SD New Hire Reporting

Try not to be overwhelmed by all this. My new book Paying Workers in a Homeschool Organization can help you understand your payroll obligations.

Carol Topp, CPA


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Paying Workers in a Homeschool Organization-2nd edition

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Update on the IRS and Booster Club Fundraising

I mentioned in a previous post that three booster clubs in KY were being fined by the IRS for their fund raising practices. The issue was that the booster club was giving parents credit for their fund raising efforts.

The IRS and Fundraising

The booster clubs have appealed to their congressmen for help.  But it appears the IRS is digging in its heels on this issue. From the Lexington Herald-Leader:

Lois G. Lerner, Director of Exempt Organizations for the IRS, explained in a letter to the booster clubs that any booster club that raises money to benefit an individual student rather than a group is in violation of federal law and stands to lose its tax-exempt status. Lerner said the practice was against federal law.

“The requirement that each parent/member of the club must participate in the fund-raising activities in direct proportion to the benefits they expect to receive toward their children’s expenses directly benefits specific individuals and the parents instead of the class of children as a whole,” she wrote.

Do a Google search on “KY Booster Club IRS” to read more on the story (copyright prohibits a direct link)

So my advice is as before: If your organization is sharing, dividing or distributing fund raising proceeds to individuals or families, stop the practice and leave all fund raising proceeds in the general fund to benefit the group at large.

I’ll keep watching this issue. If the congressmen have any success with the IRS, I’ll let you know via this blog and my monthly newsletter (subscribe in the upper right hand corner of this page)

Carol Topp, CPA

The IRS and Fund Raising

The IRS is playing Santa Claus this Christmas!

No, the IRS is not giving out presents this Christmas, but they are like Santa Claus and “making a list, checking it twice, gonna find out who’s naughty and nice...” and they have found some naughty children.

It seems that several booster clubs in KY were audited by the IRS and were fined for their fund raising practices. The issue was that the booster club was giving parents credit for their fund raising efforts. Like a lot of organizations, the parents worked at concessions stands, car washes, candy sales and bongo games. The booster club awarded parents monetary credit for working the fundraisers. The IRS fined one organization $61,000! The group is even facing losing 501c3 tax exempt status. Sounds like the IRS is playing Scrooge and not Santa!

It is a common practice to set up individual accounts and split the fund raising proceeds among the parents that participated in the fund raising effort. If Johnny sold the most candy, he gets the largest share of the fund raising proceeds in his account. The IRS is concerned about private benefits. They expect to see the entire group of students benefit from fund raisers, not individuals.

If your organization is sharing, dividing or distributing fund raising proceeds to individuals or families, you are on the IRS naughty list! You had better restructure your fund raising efforts and get on the IRS nice list.

If you care to read more, do a Google search on : “KY Booster IRS.” The report from the Lexington Herald-Leader at Kentucky.com is most thorough in telling the story about KY’s booster clubs. (copyright prohibits me from a direct link)

Merry Christmas everyone!

Update posted January 14, 2009: Update on the IRS and Booster Club Fundraising

Carol Topp, CPA

New EIN for New Officers?

Does your group need a new Employer Identification Number (EIN) when there are new officers?

Hi Carol,
Thanks to your wonderful services in the past we have gone from a ministry under a church to an informal non profit support group within the community. Thanks so much for what you do for homeschool groups!
I was just reading through the list of FAQ’s and have one that has a little twist to what is already there about EIN’s so I thought I would run it past you.
As the current director (board leader), I had been the person to apply for the EIN for our group. I am nearing my finish on the board and we will have new board leaders. Do we have to have a new EIN issued? I know this current one was opened with my name as the responsible party, so I don’t know if that would “tie” me to the non profit for any thing down the road if I am no longer on the board?
Thanks so much for your help and/or direction.
Blessings,
Shawna B, CA


Shawna,
Thank you for your kind words. It was my pleasure.


You do not have to apply for a new EIN just because of a switch in officers. Nonprofits change leadership frequently.

You can have your name on the EIN replaced with the new leader by filling out IRS Form 8822-B

If you are a 501c3 tax exempt organization with more than $50,000 in gross revenue annually, you should be filing the annual Form 990 with the IRS. On the Form 990, you list the new officers’ names.

If your organization makes less than $50,000 per year then you should be filing the 990N, an electronic postcard, with the IRS. The 990N requests only the name of the “principle officer” not the entire board.

For more information on the 990N, visit the IRS website at:

http://www.irs.gov/charities/article/0,,id=169250,00.html

Carol Topp, CPA

Rewarding volunteers in your homeschool organization

HomeschoolCPA has been getting quite a few questions via e-mail lately…here’s one I thought I’d share with you having to do with rewarding volunteers.

Carol,

Thank you for your web site. It is a great resource for homeschool groups.

I’m on the board of a home education association. We hold an annual conference of about 800 – 1000 and need many volunteers to help us with the event. What are some appropriate ways to thank the volunteers? Can we give them a gift (e.g. mug)? Can we give them free parking? Can we give them a dollar amount off admission for each shift they work? From one of the answers you gave in your FAQ, it appears it is OK to give discounted admission to the conference, but I just want to confirm that.

Can we give more to key volunteers (ones who are responsible for key areas of the conference and will not be able to attend sessions)? Can we give key volunteers a complete set of CDs from the conference, hotel rooms and meals while at the conference? Do we have to report this on the 990 also?

Thanks for your great help.
Dorothy K

Dorothy,
Thank you for your kind words about my website. You ask some excellent questions. As for the mugs, free parking and reduced admission: yes, yes and yes. All these are appropriate ways to thank your hard working volunteers.

As for the CD set, hotel and meals: yes, these are also appropriate ways to thank volunteers. If any of these volunteers are also board members, you should disclose these expenses paid by the organization on their behalf on Form 990 Part V-A Current Officers compensation. I’d include a note to the effect that the volunteer was given lodging and meals at the annual convention. This is not taxable income to the volunteer. Putting the information on the Form 990 is just a way of disclosing to the IRS and anyone reading your 990 that you pay expenses for volunteers. That is a completely legal, legitimate and generous thing to do!

I hope that helps! Best of success in your future efforts!

Carol L. Topp, CPA

Homeschool group avoids IRS tax notices

A homeschool group in Georgia asked for my help because they had been getting letters from the IRS about back taxes.

We are in dire need of your help. Our homeschool group has received notices from the IRS saying that we need to contact them regarding our overdue taxes. Our group was incorporated (in 2003) but we have not filed any paper work (tax returns or corporate updates) since. Please advise, as soon as possible.
TD, Georgia

I e-mailed and spoke to this homeschool leader several times, so I’ll summarize the resolution:

The treasurer e-mailed me because she had been getting letters from the IRS stating that the homeschool group was late in filing their corporate income tax return. The group ignored these letters for a few years until they found my website. It seems that the original founder had mistakenly thought that the group owed corporate income tax on their surplus. She had filed a Form 1120 (Corporate Income Tax Return ) with the IRS and paid them $71 several years ago. The IRS expected to see corporate tax returns every year thereafter and was mailing the letters when the returns were not filed.

Fortunately, the group had filed for nonprofit incorporation status with the State of Georgia several years before. This was solid documentation that the group was a nonprofit organization (even they did not have 501 tax exempt status with the IRS).

I called the IRS on behalf of the group and the IRS employee told me to mail a cover letter and a copy of the nonprofit incorporation certificate from the State of Georgia. I did so and when I called the IRS two weeks later, the IRS employee told me that the situation was taken care of, the case was closed and the group wouldn’t be getting any more letters! (We didn’t ask for a refund of the $71 previously paid, though!)

That is an excellent example of how nonprofit incorporation status helped one group avoid paying federal corporate income tax. I’m not sure that I could have convinced the IRS of their nonprofit status without the nonprofit incorporation certificate from the State of Georgia.

This is NOT to say that state nonprofit incorporation is the same as tax exempt status with the IRS. Tax exempt status with the IRS (granted by applying to the IRS using Form 1023 and paying the IRS fee) is the only way to guarantee that your group’s financial surplus will truly be classified as tax exempt.

You can read more about the benefits of nonprofit incorporation and tax exempt status in my book The IRS and Your Homeschool Organization.

Carol Topp, CPA

Can my individual homeschool have a fund raiser?

HomeschoolCPA has been asked this question twice lately,

Can we (an individual homeschool) be allowed to do fund raising similar to youth sports groups, scouts,etc?

What a good question. In general I say, Yes, you can participate in a fund raiser if the fund raising organization allows it. BUT, the profit you make is taxable income and you’ll need to report it on your tax return.

Another homeschooling mom e-mailed me with a similar question:

With 6 children needing school curriculum, we are coming up short in finances. We contacted a calendar company that said it would be permissible for us to sell calendars as a fund raiser for our homeschool. We accepted personal checks made out to our homeschool name (that we registered with the state school board, considered a non-profit private school). We do not have a checking account with our homeschool name on it. Therefore, we have no way to deposit them.

What is your advice to us? The checks amounted to $90. Is this method acceptable to continue as long as we pay taxes on it? Mrs. W.

By selling calendars Mrs W. was operating a small for-profit business. She is free to use the profit of the small business for anything she wishes,including homeschool books and supplies. Since Mrs W. didn’t mention what state she was in I cannot tell if her state requires business registration. Many do not require any type of registration for a sole proprietorship using your own name. You may have to file a name registration with your Secretary of State to establish a business name.

To deposit these checks Mrs W. need to open a checking account in the homeschool’s name. You’ll have to get an EIN number from the IRS at www.irs.gov (See the Q&A on my website for details www.HomeschoolCPA.com). You can then spend the money in the checking account on homeschool supplies and close it or keep a small amount in it until next year.

Mrs W. should report the $90 as income on her tax return as either Other Income on line 21 of the 1040 or on Schedule C Business Income if she had expenses from the sale of the calendars (postage, mileage, etc…)

Quite a mess for a $90 fund raiser, huh? Before you try a fund raiser for you individual family homeschool make sure its worth the effort of getting a business name, EIN, and checking account. Maybe try having a garage sale or sell something to bring in income instead!

Carol Topp, CPA

Individual fundraisers and homeschool groups

Michelle in CO asked a question about fund raisers in a homeschool group:

Hi Carol,
We have had fund raisers in the past (butterbraids, a frozen pastry) and have made approx. $1,500 doing that fund raiser. We had a cooking class that prepared hot lunches and the co-op made money on those. We will have less than $100 left in the check book. We have a Fed ID #. What do we do? What about next year? Is fund raising not a good idea for us as you say in your website? We thought about charging more for membership (we charge $35/ yr now) and if people wanted to do individual fund raisers that would be up to each family. What do you think? Thank you so much for your help to the homeschool community and for whatever answers you can give us.
Sincerely,
Michelle P


Dear Michelle,

Did I say fund raising is not a good idea on my website? I didn’t mean to. Hopefully I just warned groups that fund raising can be a lot of work. And if you sell products to the public (outside your own membership) you may need to report your “solicitation” to your state. I’m writing an article now on fund raising and I do say this:

Your state may have reporting requirements if you are representing yourself to the public as a nonprofit organization. In my home state of Ohio, we have to file a Charity Registration form if we do fund raising to the public. One year we sold candles door to door and had to file a seven-page financial report with Ohio’s Attorney General Office. That report was such a nuisance (and the fund raiser was so much work) that we no longer do sales to the public. Investigate what your state requires from groups doing fund raisers. This website has nonprofit reporting requirements by state: http://www.hurwitasociates.com/.

In general I encourage groups to get most of their income from membership fees and not depend too much on fund raising. Fund raising can be very successful or turn out very poorly. It is also a lot of work with sometimes only a few people doing all the work.

I’m not sure what you mean by “individual fund raisers.” I do know that it is not proper to “award” a family for raising more money than another family, nor is it proper to set up individual accounts. It’s not right because it is not in keeping with the nonprofit motive or with the idea of a group benefit. In short, individuals are not supposed to benefit; the group is supposed to benefit.

Thank you for your kind words. I hope my website was helpful. I wish you success in Colorado as you serve homeschooling families!

Carol Topp, CPA