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

Save

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?

Image result for mary poppins image

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

BuyPaperbackButton

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