CC Directors: Do not give yourself a 1099-MISC

I have spoken to several Classical Conversations (CC) Directors lately who tell me that they gave themselves a 1099-MISC to report what they paid themselves.

But this is not correct! CC Directors should not give themselves a 1099-MISC.

I can understand their confusion. These Directors are business owners of a Classical Conversations community offering classes for homeschool students and their parents in how to educate their children using classical methods. Typically, these Directors hire tutors as independent contractors to teach a class once a week and frequently the Directors also teach a class themselves.

They give their tutors a 1099-MISC to report their earned income and so they think they should give themselves a 1099-MISC as well. But this is not the correct way to report income as a CC Director.

As a business owner (and I’m referring to a sole proprietorship filing a Schedule C on their Form 1040) a CC Director is not paid as an independent contractor. Business owners are not “paid” at all. Instead they get to keep all the profit that the business makes. That profit is their “pay” or earnings from the business.

How to correctly report your income from your CC business

One Director told me that she reported her 1099-MISC as her total income on her Schedule C Business Income or Loss. But this is not correct. I explained that she needed to report all the income that the participating families paid her. That amount is her total income, not what she “paid herself” and reported on a 1099-MISC (incorrectly).

“Oh dear,” she replied, “I’ve been doing it wrong for three years!” Yes, she had been. ūüôĀ

I explained that she needed to file a Form 1040X  Amended Tax Return to correctly report her income on her Schedule C for those prior years.

I also advised her to contact a local CPA to help her learn how to correct her tax returns and prepare it properly in the future.

How to correct a 1099-MISC

If you have given yourself a 1099-MISC, then you need to correct it ASAP!

Start by reading IRS Instructions to Form 1099-MISC page 10. Follow the instructions carefully. Check the CORRECTED box. Include yourself with $0 (zero) in Box 7  Non-employee compensation.

I recommend you contact a local CPA to help you file the corrected 1099-MISC.

If you’ve already prepared your tax return with the incorrect 1099-MISC, you’ll need to file a 1040X as well to amend your tax return.¬† It’s time to get professional help!


Business taxes and paying employees or independent contractors is not a guessing game! There are professionals like CPA and tax professionals who can help you file your 1099-MISC and tax returns correctly.

How to find a local CPA or accountant
I recommend you hire a local CPA or tax professional because they know your state and local laws best. If you do not already have a CPA or tax professional (and I don’t mean a store front tax preparation service) I recommend you try Dave Ramsey’s Endorsed Local Providers or Quickbooks Proadvisors.
A lot of CPAs listed on these sites specialize in small businesses.

Business Consultation

I am not accepting new tax clients, but I will offer a phone consultation for CC Directors, tutors and other homeschool business owners. Contact me to request a phone consultation.

 

Carol Topp, CPA

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

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 me, 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 (Income less all your business expenses) 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 (your income less any expenses) in the year, you will also have to fill in a Schedule SE and pay Self-employment tax (it’s 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 the past year you may need to file some paperwork with the IRS! The deadline is January 31 to give your workers a 1099-MISC or W-2.

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

 

 


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Are violin lessons and ballet classes tax deductions?

Hi Carol, I just discovered your great website.
I pay several people for private instruction for my child: violin lessons by a private teacher, gymnastics, ballet in a nonprofit ballet school.
Can I send a 1099-MISC to any of these people or organizations?
I’d like to keep my tax liability as low as possible.
Thanks for any guidance you can provide.
Kimberly

Kimberly,

The Form 1099-MISC is to be given to a person who provide services to your trade or business. You do not give 1099-MISC to people you hire for your personal expenses (violin lessons for your children, etc).

Here’s what the IRS website says:

  • Report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business. (my emphasis added)
  • Report payments of $10 or more in gross royalties or $600 or more in rents or compensation. Report payment information to the IRS and the person or business that received the payment.

Your personal expenses (violin lessons, gymnastics, ballet) are not tax deductible expenses.

I hope that helps,

Carol Topp, CPA
HomeschoolCPA.com

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I’m a Classical Conversations Director. Do I have to file any forms with the IRS?

On April 15 last year (you know, that day the personal tax returns are due!), I received this email:

I need to be sure I don’t have any tax forms to file with IRS. This was our first year as a CC community, with only 2 tutors and 12 children.
-Name withheld to protect the guilty

 

Just as aside before I answer her question: This CC Director treated her tutors as independent contractors all year long. That may or may not have been the proper worker classification for them. She may have exerted enough control over the tutors that they should have been treated as employees, but I did not address that issue with her. At this point, what the director did in the past with regard to paying her tutors is done; it cannot be changed now. I addressed what she needs to do now to properly file her taxes.

Dear Name withheld,

As a Classical Conversations (CC) director, you are a small business owner.

You should have given your tutors a Form 1099-MISC to report the income you paid them (assuming you classified them as independent contractors). The Form 1099-MISC is to be given to each tutor by January 31 each year for the income paid in the prior year. A copy is also sent to the IRS. It sounds like you missed that deadline.

By the way, you cannot simply print the Form 1099-MISC from the IRS website. You must order forms from the IRS, purchase them at an office supply store, or use an online filing program like Yearli.com (that’s the service I’ve used to file my 1099-MISC).

You should also have reported your income and expenses from your CC business on your personal income tax return, using Form 1040 Schedule C Profit or Loss from Business.

If you had a profit of more than $400 for the year, you will also owe Self-Employment Tax. It is calculated on Form 1040 Schedule SE.

I’m afraid you are very late in filing these forms! You may owe a penalty for late filing your 1099-MISC forms. You may need to file an amended federal income tax return (Form 1040X)¬† if you failed to include your CC income and expenses. You may also need to amend your state income tax return.

I strongly recommend that you contact a local CPA to discuss amending your  federal and state income tax returns.

You may also need to address if independent contractor status is the proper classification for your tutors. My book Paying Workers in a Homeschool Organization can help you determine the best classification for your workers.

Carol Topp, CPA

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Recording of Business Failure in the Homeschool Marketplace webinar

Yesterday I presented a webinar “Business Failure in the Homeschool Market that many of you (about 90!) attended.

 

Here’s the link to download the recording of the webinar.
The webinar lasted 2 hours because of all the questions asked, so it may take a few minutes to download.

 

Here’s a handout of the information I discussed.

 

We talked about
  • What triggers an IRS audit into worker classification
  • Factors to determine independent contractors or employee status
  • Consequences of misclassification and IRS programs to avoid penalties
  • What options are there for a homeschool co-op or academy
  • Are homeschool tutors or teachers at risk

I referenced my book Paying Workers in a Homeschool Organization which may be helpful to many of you.

 I also mentioned that I offer a Worker Classification determination service if you need help determining if your workers are independent contractors or employees.

I’m happy to help and relieve any anxiety you have about this confusing topic.

Carol Topp, CPA

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What are the consequences of misclassifying a worker?

In the news and social media recently has been the sad story about a popular service offering classes for homeschool students having to close. In late December 2016, Landry Academy announced “It is with much sadness that we close the doors of Landry Academy.”

I do not know the details of their unfortunate situation, but it seems that there was an IRS requirement for Landry Academy to reclassify their teachers as employees, rather than independent contractors.

You may be wondering: What are the consequences of misclassifying workers?

Here’s what I tell business owners, nonprofit leaders, and anyone else hiring workers:

IRS Penalties

Under Internal Revenue Code section 3509 the penalties for worker misclassification include:

  • Paying a portion of federal income tax (1.5% of payroll),
  • Employer (100%) and employee (20%) shares of FICA taxes
  • Federal unemployment compensation taxes (FUTA).
  • In addition penalties for missed deposits (10%) and withholdings (20%) can be assessed.

Additional penalties include:

  • $50 for each Form W-2 that the employer failed to file because of classifying workers as an independent contractor.
  • A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.

Other Penalties

That’s pretty bad when you ad it all up, but the list of consequences goes on to include:

  • Penalties for failure to file state and local income tax withholding
  • Penalties due to unemployment insurance shortfalls
  • Worker‚Äôs compensation violations
  • Improper exclusion from benefit plans such as pension, retirement plans, health insurance, paid leave, severance pay, etc.

Here’s a long list of The Consequences of Misclassifying Your 1099 Contractors

Scared yet? You probably should be.

Worker misclassification is a serious issue and can cause significant financial hardship and has caused several businesses to close.

Here’s help

My book Paying Workers in a Homeschool Organization can help clear a lot of confusion, but perhaps you want to discuss your particular situation in a private, individual phone consultation.

I offer phone consultations to help you determine if your homeschool organization’s workers are employees or independent contractors. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps.

To request a consultation, please contact me. I’m happy to help and relieve any anxiety you have about this confusing topic.

Carol Topp, CPA

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Webinar on business failure in the homeschool market

I am always saddened to hear about business failure in the homeschool market. I feel pain for the business owner, their employees and their customers.

  • How can this happen?
  • Can it be avoided?
  • What can a customer do if they have lost a lot of money?
  • What lessons can a homeschool business or homeschool co-op learn from others’ failures?
  • Are homeschool teachers and tutors at risk?

I’m going to answer all these questions and more during a live webinar hosted by Tammy Moore of Virtual Homeschool Group¬†

Webinar: Business Failures in the Homeschool Marketplace

 

Date: Saturday January 14, 2017

Time: 2:00 pm ET, 1:00 pm CT, 12 noon MT and 11:00 am PT. The webinar will last about 60 minutes.

Cost: Free

Topics:

  • For parents: How can parents avoid losing money?
  • For homeschool businesses and nonprofits: Could it happen to us?
  • ¬†IRS audits, penalties and safe harbor provisions
  • Worker Classification: General guidelines and possible solutions
  • For homeschool teachers and tutors: Are you at risk?

Join the webinar  here

You’ll need to download the webinar application on your computer or mobile device before the webinar begins.

or phone in on Saturday January 14 at 2 pm ET/1 pm CT (only audio)

Call-in number: 571-392-7703

Participant PIN: 375 427 129 85

 

Here’s a handout I created.

I hope many of you will join me on Saturday January 14, 2017 to discuss this very important and timely issue.

Carol Topp, CPA

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Are Classical Conversations tutors employees or independent contractors?

Hi Carol,
I am a part of a Classical Conversations community with a Foundations/Essentials director. The Foundations/Essentials directors hire tutors to run the classrooms on community day.

I am concerned that the  tutors are being treated as employees even though they are paid as independent contractors. Can a Foundations director hire tutors as independent contractors and still be able to specify what time they start, what material to cover and for how long they are to cover it, require training in the summer and training every 6 weeks of class etc?

Would a contract help? It seems like the contract could call the tutor an independent contractor but the Director could still treat them like employees.

This is hugely concerning and our campus wants to operate in a legal way. We are considering hiring a lawyer to help us understand all this. Is the lawyer the way to go? Or would you be able to advise on how to handle this?

We want to be legal and try to sort out truth in this whole legal situation.

Thank you for your time,

Katherine

 

Katherine,

Thank you for contacting me. I have been talking to several Classical Conversation (CC) Directors and tutors about worker classification. It’s a confusing and complex topic!

Factors: control and key activity

The question of whether CC tutors are independent contractors (IC) or employees is not cut and dried, nor the same for every CC community. There are many factors to consider including some you mentioned such as training, specific time and place to work, the curriculum to use, etc.

Two factors to consider are: the amount of control and if the tutors are providing a key activity of the business. (By the way, these factors of control and providing a key activity apply to all types of homeschool groups, not just Classical Conversations.) Some homeschool organizations may control their tutors so much that they treat them like employees, while others may allow more freedom and could be properly classified as ICs. Some homeschool organizations may depend heavily on the tutors’ services as the key activity of the business, while other homeschool groups may not use tutors as the key activity because they rely on volunteer parents to teach their classes.

Would a contract help?

You asked, “Would a contract help? It seems like the contract could call the tutor an independent contractor but the Director could still treat them like employees.”

You’ve hit the nail on the heard. Having a contract is not assurance that a tutor is an independent contractor; how they are treated carries more weight in determining proper worker classification.

Worker Classification Determination

You asked, “Is the lawyer the way to go?¬† Or would you be able to advise on how to handle this?

I can make a fact-based worker classification determination. In this determination, I substantiate my opinion based on all the facts, not just the few you mentioned, and court cases involving worker classification.


Additionally, I also just updated  my book Paying Workers in a Homeschool Organization. It explains both the current criteria the IRS uses and the criteria they have used in the past to determine independent contractor or employee status.

 

 

 

 

You could, of course, convert all your tutors to employees, and sleep better at night! I can explain the steps you’ll need to take.¬† It will be more paperwork and more expense, but you won’t worry about an IRS investigation on worker status.

Carol Topp, CPA

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Top 10 blog posts of 2016

 

Here is a round up of the top 10 most important blog posts from HomeschoolCPA in 2016.

 

Many of them have to do with paying workers in a homeschool organization, probably because I was asked a lot of questions about paying volunteers, giving discounts in stead of paying teachers and the difference between employees and independent contractors.

I also spent a lot of time in 2016 researching and writing Paying Workers in a Homeschool Organization and my blog posts reflect what I was learning.

Compensation to homeschool board members is taxable income

Paying Workers in a Homeschool Organization updated book is ready!

Are homeschool co-op tuition discounts taxable income? Probably!

Can you discount a homeschool co-op class in lieu of paying the teacher?

How you pay your homeschool teachers could affect the property tax exemption for your host church

Can a homeschool group just get together without having to report to the IRS?

Adding religious purpose to bylaws and Articles

Use Quickbooks online for free

Are discounts to homeschool board members taxable compensation?

How the IRS defines a school

I wonder what 2017 will bring in the world of homeschool organizations!

Sign up for my email list to be kept up to date on the questions homeschool leaders are asking.

P.S. Subscribers to my email list get freebies, discounts and special reports I share only with them.

Carol Topp, CPA
HomeschoolCPA.com

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Do the new overtime rules affect homeschool groups?

question_mark_15715

The US Department of Labor (DOL) proposed new rules about paying workers overtime. Several people have asked me if homeschool organizations have to follow these new rules.

My answer is that yes, in general, homeschool organization whether nonprofit organizations or for-profit businesses have to follow the rules in the Fair Labor Standards Act (FLSA) regarding minimum wage and overtime.

But occasionally, there are exceptions, so read on!

New Overtime Rules

The new overtime rules were supposed to take effect December 1, 2016. (They been held up by an injunction by a federal judge). The new proposed rules raise the threshold for when an employee is exempt from getting paid overtime. If your employee makes less than $47,476/year, you must pay them overtime at time-and-a-half when they work more than 40 hours a week. The threshold used to be only $23,660/year, so this was a big jump. Under the new proposed rule many more workers are eligible for overtime.

The impact on nonprofits and churches of paying overtime could be huge since many of their employees put in more than 40 hours a week. They work long hours because they are passionate about their mission. Fortunately, the Department of Labor has an exception to the FLSA for nonprofit organizations.

Exceptions to New OT Rule for Nonprofit Organizations

Here’s an except from”Overtime Final Rule and the Non-Profit Sector” a paper from the US Department of Labor available at https://www.dol.gov/sites/default/files/overtime-nonprofit.pdf

the FLSA applies to businesses with annual sales or business of at least $500,000. For a non-profit, enterprise coverage applies only to the activities performed for a business purpose (such as operating a gift shop or providing veterinary services for a fee); it does not apply to the organization’s charitable activities that are not in substantial competition with other businesses. Income from contributions, membership fees, many dues, and donations (cash or non-cash) used for charitable activities are not counted toward the $500,000 threshold.

Let me unpack that for you.

If your nonprofit has less than $500,000 in “business” income (that does not count your contributions, membership fees or dues), then your organization is not covered under FLSA and you do not need to comply with the overtime rules.

Here’s an example from a longer DOL document, “Guidance for Non-Profit Organizations on Paying Overtime under the Fair Labor Standards Act.” available at https://www.dol.gov/whd/overtime/final2016/nonprofit-guidance.pdf

A non-profit animal shelter provides free veterinary care, animal adoption services, and shelter for homeless animals. Even if the shelter takes in over $500,000 in donations in a given year, because the shelter engages only in charitable activities that do not have a business purpose, employees of the animal shelter are not covered on an enterprise basis.

By “not covered on an enterprise basis,” the DoL means the FLSA does not cover the workers and they are not entitled to overtime.

A lot of homeschool nonprofit organizations just breathed a sigh of relief. They rarely have business income and it almost never exceeds $500,000, so they do not have to pay their employees overtime.

Warning: It’s not as simple as it seems!

This issue is not as simple as saying, “My nonprofit doesn’t have $500,000 income, let alone “business” income, so we don’t have to pay any employee overtime.”

I urge you to read the DoL documents I mentioned above and consult with an experienced professional familiar with employee laws and the Fair Labor Standards Act in particular.

The Kentucky Nonprofit Network offers a helpful 9-page report on steps to take if your nonprofit is affected by the new overtime rules (when and if they go into effect).

Carol Topp, CPA

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