Do homeschool teachers get the Educators Expense deduction?

IRS

I am frequently, “Are there any tax breaks for homeschooling parents?”  My usual reply is, “No; there are no tax credits or deductions for homeschool expenses at the federal level.” There are tax breaks offered by some states that I discuss in another blog post.

But here’s a bit of a new twist on the question from a homeschool mother.

I spoke with an IRS representative just today about an educator’s expense tax break.
The IRS rep stated that IRS laws specifically prohibit homeschoolers from getting up to $250 credit for educational items purchased. However, he stated congressional law overrides IRS law and that congressional law requires teachers work in a school as defined by state law. In our home state, Kentucky, we are considered private schools. The IRS rep suggested I give the credit a go next year but be prepared for an audit. Can you shed some light on the situation?

She is referring to the Educators Expense deduction of up to $250 in unreimbursed expenses.

The IRS guidelines say to be an eligible educator:

“You work at least 900 hours a school year in a school that provides elementary or secondary education, as determined under state law.”

To work means to get paid (to the IRS, not to all of us SAHMs!).  Homeschool parents are not employees of a school.  We do not get paid; we do not get a W-2.  I attended a tax workshop where we were told that the IRS will check for a W-2 from a school if a taxpayer takes the Educator Expense deduction. Homeschoolers would not have a W-2 from a school, even if your state classifies your homeschool as a private school.

The intention of the tax deduction was to move the deduction from the Schedule A (Itemized deductions) Miscellaneous Deductions where it was subject to a 2% of Adjusted Gross Income limit (meaning anything over 2% of your AGI could be deducted) and put the deduction on the front page of the 1040, so even teachers who don’t itemize deductions can take advantage of the $250 deduction.

The Educator Expense Deduction was nearly eliminated in 2006, but received an extension.  I predict the deduction will not be around for much longer.  IMHO, it was President Bush’s attempt to get a few votes from paid teachers.

So in short, I do not take the Educators Expense deduction, nor recommend that other homeschool families take the deduction.  The IRS rep was right, be prepared for an audit.  But without a W-2 from a school, you won’t win.

HTH,
Carol

P.S.  Here are my required “lawyer” words:
Internal Revenue Service Circular 230 Disclosure:  Advice relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of  avoiding penalties under the Internal Revenue Code or  promoting, marketing or recommending to another party any transaction or matter addressed herein.

Bank account for your family homeschool

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This homeschooling mother in NC ran into a problem when she tried to open a bank account for her family homeschool.

I live in North Carolina, homeschool my children and want to do some fund raising for some projects and field trips and also school supplies.

I went to the bank, wanting to open an account in the homeschool’s name and they said that I would have to open up an account in my name doing business as my homeschool’s name.

My question to you is, how do I go about paying taxes on the money? I do not want to get into trouble with the IRS. Was that the right thing for me to have done? Waiting to hear from you soon!
Kim

Dear Kim,

I’ve been asked questions like yours before. I answered them in two posts on my blog.

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

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.

Can my individual homeschool have a fundraiser?

Individual fundraisers and homeschool groups

I hope that answers your question; let me know if it doesn’t.

Carol Topp, CPA

IRS Intimidates Homeschool Group

I have helped several homeschool groups obtain tax exempt status with a 100% successful track record (no one has ever been denied by the IRS). One homeschool group even received their tax exempt status letter from the IRS in only three weeks!  That’s amazingly fast for the IRS; it typically takes 3 months!

But recently a homeschool group in Texas e-mailed me for help. They had applied for tax exempt status as a 501c3 educational organization.  I did not prepare their application, but looked over their website and they appeared to be similar to hundreds of homeschool organizations across the US. But the IRS was going to deny their application, keep their $750 application fee, bar them from applying again and claimed to be building a file to be used against other organizations like them seeking tax exempt status!

This was horrible and could have had a huge negative impact on homeschool co-ops and support groups across the US.  I recommended they speak to the attorneys at Homeschool Legal Advantage. There is a time and a place to hire a lawyer and this was it!

Homeschool Legal Advantage recently e-mailed this update

Homeschool Legal Advantage was recently contacted by an organization in Texas encountering difficulty and intimidation from the Internal Revenue Service.  The organization sought to receive tax-exempt status from the IRS under section 501(c)(3).  The IRS agent told the group it did not qualify and the agent was compiling research and examples to use to deny other homeschool groups in the future.

One of HLA’s attorneys got involved and discerned part of the problem was the organization’s use of the term “co-op.”  This term has an entirely different meaning for tax purposes than it does for homeschoolers.  Our attorney suggested to the group’s director that she revise the groups IRS tax exempt application to indicate they were applying as a club under IRS regulation 501(c)(7), with the 501(c)(3) designation of a co-op as an alternate.

The group can qualify as a tax exempt 501(c)(7) club because it is organized and operated for pleasure, recreation, and non-profitable purposes.  Membership is limited to families who are actively engaged in home education, and no part of the group’s net earnings inure to the benefit of any private shareholder.  All of its activities are available to all of its members and all members pay the same dues.

The group’s director faxed the renewed request for exemption to the IRS agent.  A few days later, the tax exemption letter showed up in the mail.  This is a victory for this homeschooling group!

As you can read they were a great help to this homeschool organization and resolved the matter quickly with the IRS.

The article mentioned the difference between 501c3 and 501c7 status and you may find that  a bit confusing. Additionally, the groups use of the word ‘co-op’ confused the IRS as to their purpose. What is right for your homeschool organization? How should you present your group to the IRS when applying for tax exempt status?

Feel free to email me to arrange a private consultation via telephone.  Each group is unique and an individual consultation will be very helpful

Carol Topp, CPA

P.S. I was so pleased to meet the attorneys with Homeschool Legal Advantage at the Midwest Homeschool Convention in Cincinnati in 2009. They were so helpful in desiring to work with homeschool organizations as well as individual families.

Homeschool Leader, Do You Need Help?

I know that being a homeschool leader is not an easy job.  You have taken on extra responsibilities in addition to homeschooling your own children. But help is on the way!

I am so pleased to announce several ebooks and audios for homeschool leaders are now available


A 39 page ebook covering money management for small, medium and large sized groups. Sample forms and examples of financial statements in clear English are provided. Also covered are topics such as using Quickbooks, collecting fees, creating a budget, insurance, and hiring paid teachers. All written specifically for homeschool groups.
Price: $10.00 (immediate download as a pdf file)
Read more and order here

A 51 page ebook explaining the pros and cons of tax exempt 501c3 status. Is it needed? Is it worth it? Also covered are non profit incorporation, the application process, and how to maintain tax exempt status. Written specifically for homeschool groups.
Price: $10.00 (immediate download as a pdf file)
Read more and order here

A  62 page ebook containing some of the most frequently asked questions from homeschool leaders on the IRS, nonprofit and tax exempt status, boards, conflict, money, fund raising, volunteers, paying workers and insurance.
Price $8.00 (immediate download as a pdf file)
Read more and order here

A 20 page ebook that covers paying workers as employees or independent contractors.  Includes sample forms, tips and advice to help you pay workers in accordance with the IRS laws. Written specifically for homeschool organizations.
Price: $7.00 (immediate download as a pdf file)
Read more and order here

Are You Ready? Tax Exempt 501c3 Status for Homeschool Organizations

audio download
An hour-long audio that explains the advantages of 501c3 tax exempt status for your homeschool group. What’s involved, what will it cost and is it worth it? All specifically for homeschool groups.
Price: $7.00 includes a file of the presentation slides
Read more and order here

An hour-long audio that explains the importance of boards, budgets and bylaws in a homeschool organization. Get your group set up correctly and running smoothly. All specifically for homeschool groups.
Price: $7.00 includes a file of the presentation slides
Read more and order here


I hope you find these ebooks and audios helpful as you run your homeschool organizations.
Carol Topp, CPA

Update on teachers as independent contractors

In Is Your Hired Teacher Really an Employee? I mentioned a homeschool group dealing with the IRS over teacher classification as an employee or independent contractor (IC).

They replied to the IRS via a letter stating their case for worker status as an Independent Contractor. They heard back from the IRS and the IRS determined that the teacher was misclassified as an independent contractor and should be reclassified as an employee.  The IRS wants $500 in back taxes (at least there are no penalties!)  The homeschool organization strongly disagrees and contacted a labor law attorney to help draft a letter back to the IRS.

Update:  The IRS issue was settled with the IRS winning the issue. The homeschool organization reclassified all their teachers as employees. There were no penalties to pay to the IRS, but then the State of Ohio audited this homeschool group and has fined them  $3,000-$4,000 a year for three years for unpaid unemployment taxes.  The State of Ohio sided with the IRS that the workers were employees and the organization should have been paying unemployment taxes on them.  Thankfully, the state can only audit back for three years.

The issue brought to light that many (perhaps most) homeschool organizations that hire teachers pay them as independent contractors.  Most homeschool groups are small nonprofits without accounting staff to manage the paperwork of withholding and paying employment taxes, creating W-2s, etc.  It’s easier to deal with an IC than an employee.  But the IRS reminds us the the facts of the situation determine worker status, not the organization’s preference.

Also, most hired homeschool teachers are only teaching about one hour a week and are given a lot of freedom in how to conduct their class.  This was all true for my client, but the IRS still determined the teacher was an employee. She even signed a IC agreement three years in a row, so even a contract was not enough evidence for the IRS.

Here’s what I’m doing:

1. Telling my homeschool clients that hire teachers to carefully consider worker classification.  Having a signed IC agreement is not enough.
2. Advising some of my homeschool clients to reclassify teachers as employees and start withholding federal income tax, Social Security and Medicare taxes.  These clients hire several teachers for several hours a week and exert a lot of control over what and how they teach.  One group also does teacher training and evaluations so the workers definitely look like employees.

3. Change the way my small co-op pays teachers.  The IRS letter stated , “if the worker had been an independent contractor, the parents would have directly paid the worker for the services she provided for their children.” Starting next semester we will have parents pay the hired teachers directly. See Paying teachers in a homeschool co-op to read our story

4. Trying to get out the word to homeschool leaders about the potential problems of worker misclassification and in general the employment laws regarding hiring paid teachers.

5. Encourage homeschool leaders to read my book Paying Workers in a Homeschool Organization. It can buy you a lot of peace of mind.

 

Please pass on this information to homeschool groups that you know hire paid teachers.  It doesn’t pay to be ignorant.

Carol Topp, CPA

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How do homeschool groups identify their status as a public charity?

A homeschool group in MO is applying for 501c3 tax exempt status and had a question.

Hello Carol
I am working with Crossroads Christian Connection in MO. We need to complete our 1023 (Note: He means IRS Form 1023 Application for 501 Tax Exempt Status) . The question I have is on Part X Public Charity Status. We are a small homeschooling group of about 45 families with revenue of less then $5,000 per year, on line 5, I need to know how home-school groups identify their status as a public charity.
Do you have samples of other groups that have filed the 1023?
Thanks

Greg S


Greg,

Homeschool groups are usually classified as 509(a)(2) organizations because more than 1/3 of their income comes from membership fees or “activities related to the exempt function” (box 5h).

Form 1023’s are public information so you should be able to request a copy from any other 501c3 organization. You can use the IRS website to find homeschool organizations with 501c3 status. (Go to http://www.irs.gov/charities/index.html and click on Search for Charities on the right column). Guidestar.org also posts Form 1023’s for charities.

I provide a review service for the Form 1023. From my website:


Buying Peace of Mind
A review of forms you have prepared yourself. Save money by doing much of the work yourself. I will review Forms 1023 or Annual Form 990 and offer my opinion and advice. Cost: $100 per form. Time: 1-2 weeks.


I’m doing a review right now for a homeschool group in KY. I just sent them two and a half pages of corrections or omissions they had made on their Form 1023 as well as suggestions on how to phrase their Part III Narrative to help the IRS understand their mission. Please contact me if you’d like me to review your application before you mail it to the IRS. I’d be happy to help.

Carol Topp, CPA

Is it a homeschool co-op or Mary Poppins?

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I started my website HomeschoolCPA to help homeschool organizations, but sometimes the lines between a family homeschool and a homeschool organization get a little fuzzy. Here’s one example of the new and creative ways the people are homeschooling today.

I am considering starting a homeschool with a group of 5 children. They are all from different families and none of them is my own. I have a Masters degree in education and am comfortable working as an independent contractor. I plan on teaching these children in one of the boy’s home with the parents’ blessing. Is this legal? What do I need to do to set it up? Would the parents need to set up a homeschool co-op? I am having difficulty finding information about this for Maryland. Thanks for your help!

Mrs. A in Maryland

Dear Mrs A,

Congratulations on your new venture. Teaching other people’s children is certainly a legitimate business. You will be a modern day governess. (like Mary Poppins!)

I do not believe the parents need to set up a homeschool co-op. But you need to set up a small business. I recommend these steps:

* Pick a business name, although you can use your own name

* Consider opening a business checking account to keep your business and personal expenses separate (it helps at tax time)

* Have a written agreement with the parents about your duties and your fees (i.e. how much and when will you be paid)

* Keep good records of all our expenses, especially mileage. Read my Small Business Start-up Guide available to download here: Small Business Start Up Guide

* Set aside 20-30% of your income after expenses (i.e. 20-30% of your profit) to pay income tax and self employment tax. You will probably also need to make quarterly estimates payments to the IRS.

I’m not familiar with Maryland’s homeschooling laws, but here in Ohio we must notify if someone other than the parent does a majority of the instruction. Maryland may have a similar notification rule. You might want to do a little digging on-line and ask the families that are hiring you about Maryland’s homeschooling laws.

Best of success to you!

Carol Topp, CPA

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


payingworkerscoveroutlined

Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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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