How does the IRS prove my homeschool group’s tutor should be an employee?

 

D. is a leader of a homeschool program, Classical Conversations, who asked me about the worker status of tutors in her program: Should they be employees or Independent Contractors? This question applies to many homeschool groups, not just Classical Conversations.

What evidence would the IRS use to prove an “employee” was “treated” wrong (i.e., misclassified as an Independent Contractor when they should be an employee)? If it’s how much freedom the tutor felt they had, I am confused.

If I hire a independent contractor to paint my walls do I not have full rights to specify how, what color, the time frame I need it done, etc? How can this truly be an issued PROVED by IRS?

-D.
(edited for clarity and spelling)

 

D.,

Let me clear up something.

The IRS rulings, decisions and determinations on worker status are based on common law, not scientific facts.

Common law is the body of law derived from custom and judicial precedent rather than statutes. Common law (also known as judicial precedent or judge-made law, or case law) is that body of law derived from judicial decisions of courts (Wikipedia definition https://en.wikipedia.org/wiki/Common_law)

The common-law system is used in all the states of the United States.

Common law and the IRS does not use the word “prove” as used in science. Instead judges and the IRS make judgements or determinations. Application of IRS regulations and determinations is not science, it’s law and that’s a different mindset.

Things cannot be “proven” in law like they can in science.

Under a common-law system, disputes are settled through an adversarial exchange of arguments and evidence. Both parties present their cases before a neutral fact finder, either a judge or a jury. The judge or jury evaluates the evidence, applies the appropriate law to the facts, and renders a judgment in favor of one of the parties. Following the decision, either party may appeal the decision to a higher court. Appellate courts in a common-law system may review only findings of law, not determinations of fact. Source: https://legal-dictionary.thefreedictionary.com/common+law

I’ve written several blog posts on the factors (or “evidence”) that the IRS considers in making a worker determination. Here’s one: Behavior Control of an Independent Contractor

Behavioral Control, which you mentioned in your question, is only one of the many factors to be considered.

The IRS says,

“Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.”

So citing an Independent Contractor painting your walls is not relevant in determining worker status of a teacher in a homeschool program or Classical Conversations group. They are very different situations.

A better comparison is an adjunct instructor at a local college. The IRS has several rulings about the worker status of college instructors. There have been several court cases involving instructors in an education setting. Reading these court cases and IRS rulings and determinations have led me to the conclusion:

Because instruction is a fundamental component of a homeschool organization, instructors, tutors and teachers should be treated as employees because the homeschool group will always exert control over these workers. (from Paying Workers in a Homeschool Organization by Carol Topp, CPA)

 

If you want more details, my book Paying Workers in a Homeschool Organization will be a big help.

I also offer a Worker Determination service to help decide if your tutors are misclassified as Independent Contractor  when they should be paid as employees.
Carol Topp, CPA

Should a Classical Conversations Director be an LLC?

I am a CC director. I am not sure what is the best option when it comes to register our community. A LLC or as a Sole Proprietor? Thank you so much for your help.

Maria

 

Maria,

By default, if you are the only owner of your business, you are a sole proprietor. You could consider adding LLC status to your sole proprietorship business if you want the limited liability protections that LLC status offers.

The reason that most businesses use the LLC structure is for limited liability. That means the liability is limited to your business and its assets and not your personal assets. I organized my own sole proprietorship accounting practice as an LLC  because I wanted limited liability and protection of my personal assets. LLC status can be added to your sole proprietorship business at any time. I ran my accounting business for 3 years and then added LLC status.

I recommend that you read up on LLC status, how to get it, maintain it (there are things you should do like not co-mingle funds and sign contracts in the name of the LLC, etc) , and what is required in your state regarding fees and reports. Some states charge a one-time fee, some charge a yearly fee and annual reports.

 

Since this is a website mainly for homeschool nonprofit organizations, I will add this note: For a nonprofit organization, such as most homeschool groups, I typically do not recommend LLC status since nonprofit corporation status in your state brings similar protections of limited liability. 

Here is a podcast episode where I discuss Should Your Homeschool Group Be An LLC?

 

But Maria is asking about LLC status for her for-profit business, not a nonprofit organization, and my advice to her may be very different from my advice to a nonprofit organization.

 

Carol Topp, CPA

I am not an attorney, nor am I offering legal advice. I recommend that you seek legal counsel if you have additional questions about Limited Liability Company status.

 

Do CC Directors pay for their own children’s tuition?

Karen, a homeschool leader involved in Classical Conversions asked,

Do Classical Conversations (CC) Directors have to write a check (to themselves) for full tuition for each of their kids?

No. A CC Director does not have to pay her own business tuition for her own children. 

Here’s why:

CC Corporate wants a Director to pay their licensing fee based on student enrollment/tuition collected, so a CC Director should track the total tuition collected INCLUDING HER OWN CHILDREN. That way she is paying CC Corporate the correct amount.

But for tax purposes, a CC Director DOES NOT write her business a check for her own children’s tuition and does not include her child’s tuition in the income reported on her tax return (I’m assuming the Director is operating her business as a sole proprietorship and is not an employee of her own business).

The reason is that a person should not be taxed when they avoid paying for services by providing the services to themselves. It’s called imputed income. There was a court case in 1928 that ruled that the imputed income from produce grown and eaten by a farm owner is not taxable as income to the farmer.[9]

Conclusion: A Director must keep track of the tuition she would owe for her children so that she pays CC Corporate the correct licensing fees, but she does not need to write a tuition check to her business and she should not report her child’s tuition as taxable income on her business tax return.

Carol Topp, CPA

HomeschoolCPA.com

My book Taxes for Licensed Classical Conversations Directors is available through Classical Conversations. Find it  in the Directors Licensing Guide  page 54, Appendix M and click on “this document.”

Can CC Director offered reduced tuition to her tutors?

 

Can a Classical Conversations director gift an Independent Contractor or employee with free or reduced tuition?

Suzy

 

Suzy,
A Classical Conversations (CC) Director can give educational benefits (i.e., discounts on tuition) to Independent Contractors (IC) or employees, but (and this is a big, “but”) the value of these educational benefits is taxable income and must be reported on their W-2 or 1099-MISC.

So a CC director can offer a tuition discount to an IC or employee, but must add the value of that discount to the tax reports she gives to her tutors (1099-MISC or W-2).

And the worker must report her paid wages and the value of this discount/gift on her tax return as taxable income. You should warn her about that in writing and face-to-face, so they aren’t surprised at tax time!

We think that taxable income is only what comes in a paycheck, but the IRS defines taxable compensation to include “educational benefits.”

compensation includes salary or wages, deferred compensation, retirement benefits…, fringe benefits (personal vehicle, meals, lodging, personal and family educational benefits, low interest loans, payment of personal travel, entertainment, or other expenses, athletic or country club membership, and personal use of your property), and bonuses.[i]  (my emphasis added)

[i] Instructions for Form 1023 https://www.irs.gov/instructions/i1023/ch02.html#d0e1909

So, yes, a CC Director can offer free or reduced fees to an Independent Contractor or employee, but it is not a gift; it is taxable income and must be included in their wage and income reporting.

A CC Director should also check her license agreement with Classical Conversations to see if reduced fees are allowed.

If you have additional tax questions about being a CC Director, I wrote an ebook that can help!
Taxes for Licensed CC Directors is available from Classical Conversation. Find it here
Carol Topp, CPA
HomeschoolCPA.com

Aren’t Classical Conversations tutors just like online tutors?

I’m a Classical Conversations Director and I have a local CPA. I have a question about independent contractor status for tutors. The articles I read here seem to suggest we should treat tutors as employees. Yet, for several years I worked as a tutor for national online tutoring company as an independent contractor. I was given training, direct oversight, evaluations, worked for 5-10 hours a week, yet I was an independent contractor.

What is the difference with CC tutors in the eyes of the IRS? Just trying to understand!

Thanks, Allison

 

Allison,
Thank you for contacting me.

You seem to assume that your worker classification as an Independent Contractor as  a tutor for a national online tutoring company was the correct classification. I’m not convinced it was.

You only told me four bits of information about your relationship with the online tutoring company (?I was given training, direct oversight, evaluations, worked for 5-10 hours a week), yet three of those practices (training, evaluations, and oversight) would confirm your status should have been as an employee, not an Independent Contractor.

When I make a worker determination, I do not base my conclusions on what other companies have done or are doing. I base my conclusions on the IRS guidelines, tax court cases, IRS rulings, and the facts and circumstances of each case.

You asked, “What is the difference with CC tutors in the eyes of the IRS?” There may not be many differences in the online tutoring and tutoring for CC,  but I don’t assume that you were correctly treated as an IC when you did the online tutoring.

Classical Conversations offers an ebook I wrote, Taxes for Licensed Classical Conversations Directors, where I explain the options to CC Directors in how to pay tutors.  You can treat your tutors as Independent Contractors and in the ebook I explain the risks and consequences involved.

You might show portions of the ebook to your local CPA and get his/her opinion. If they determine your tutors are Independent Contractors, then your should request that they put their conclusion in writing and on their firm letterhead. A letter like that could possibly help you avoid IRS penalties if you are ever investigated by the IRS. But let’s hope you never need it!
If you have more questions, I would be happy to arrange a phone consultation with you. I charge $75/hour for a consultation with a nonprofit organization. We can discuss a lot of topics in an hour, but in particular your questions about paying your CC tutors.

Carol Topp, CPA

 

Where to find the Taxes for CC Directors ebook

 

I know its the day AFTER tax filing season ended, but I just learned from two helpful people (thank you!!) where to find the ebook Taxes for Licensed CC Directors.

 

Here is what I was told:
The link is in an updated (updated March 29th) version of the Director’s Licensing Guide (DLG) on page 54.
At the end of a paragraph on that page, there is a sentence saying for more information see Appendix M and “this document,” which is the link to the ebook. 
Appendix M is a letter from Robert Bortins talking about the book. The title of the book is not mentioned, except if you click the little blue “this document” link you will see the book itself.

 

Please help out your fellow CC Directors and point them to the Directors Licensing Guide (which I believe is available online for licensed CC Directors) page 54, Appendix M and click on “this document.” 

 

Why can’t I get the ebook from Carol Topp, CPA, the author?
Unfortunately, I cannot distribute the ebook myself. My contract with Classical Conversations states that only CC may distribute the book. I am so sorry that it was not available sooner in this tax season and that it seems to be difficult for many of you to find.

 

What if I messed up my taxes?
If you read the ebook and believe you have made an error in filing your 2017 tax return, please consult a tax professional. If you prepared your tax return yourself, please contact a local tax professional to help you amend your tax return. It’s a confusing and complicated process to amend a tax return so I don’t recommend you doing it yourself. How to find a local tax professional

 

I hope that helps.
Again I apologize that the book was not available earlier in the tax season. It went through several reviews and edits and that delayed its release.

 

Carol Topp, CPA
Helping Homeschool Leaders and Organizations

Ebook Taxes for CC Licensed Directors almost ready!

I just sent the final (I hope) version of my  ebook Taxes for Classical Conversions Licensed Directors off to Classical Conversations, Inc!

The ebook will be distributed by Classical Conversations, Inc to their licensed directors. It is my understanding that the ebook will be available at no charge to the licensed directors.

Update: The ebook was released on the Directors License Guide in late March 2018. Find it here.

If you’ve already prepared your tax return for 2017, you should STILL read this ebook to be sure you did everything correctly!

If you are not a licensed director with CC, I cannot share or sell a copy with you (sorry!), but I recommend you read the following blog posts:

CC Directors: Do not give yourself a 1099-MISC

Tax return for a Classical Conversations homeschool business

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

Understanding Taxes for a small homeschool business

 

Carol Topp, CPA


Free Resource

In the ebook, I mention a bookkeeping spreadsheet for CC Directors. You can get the spreadsheet now (all it costs is your email!)

 


Save

Taxes for Classical Conversations Directors

Last tax year I was asked a lot of questions about taxes by Classical Conversations directors and tutors. Things like:

  • What tax form should I to use to report my income and expenses?
  • What expenses were tax deductible?
  • What tax forms do I need to give to my tutors?
  • How should tutors be paid?
  • How do I pay myself as a CC Director?

Fortunately, there is an ebook in the works to help CC Directors titled:

Taxes for Classical Conversions Directors

The ebook is available only to Licensed CC Directors from Classical Conversations, Inc

You can find the ebook here

 

I recommend the following blog posts:

CC Directors: Do not give yourself a 1099-MISC

Tax return for a Classical Conversations homeschool business

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

Understanding Taxes for a small homeschool business

Consult a local small business CPA. To find a local tax preparer I recommend two sources:

Both of these websites allow you to search for a local tax preparer who is knowledgeable about taxes for small sole proprietor businesses.

 

Carol Topp, CPA


Free Resource

In the ebook, I mention a bookkeeping spreadsheet for CC Directors. You can get the spreadsheet now (all it costs is your email!)

 


Save

Classical Conversations community rejected by a church

Hi! I am a Classical Conversations Director in Illinois. Our church is asking us to leave as they believe hosting us threatens their tax exempt status. Other churches who have heard this claim do not want to accept us. Any advice? -Kimberly in IL

Kimberly,

I’m very sorry to hear about your problems with finding a church host.

The church is probably worried about their property tax exemption in Illinois since your Classical Conversations (CC) community is a business and not a religious or educational nonprofit.

Property tax exemption is different from federal income tax exemption granted by the IRS. The IRS grants churches automatic status as 501(c)(3) religious organizations. That’s not what is being threatened here.

Property tax exemptions are determined by the state and sometimes the county laws. That’s what has the church worried. If they lose property tax exemption, it will be very expensive for them to pay property tax.

I did a little digging and found some information about church property tax exemption in Illinois. Illinois may deny property tax exemption to the church if an organization using the church’s property has a “view to profit.” Illinois says that having a “view to profit” is incompatible with property tax exemption.

Unfortunately, as currently structured, your CC community has a “view to profit” and the church doesn’t want to offer your group space to meet and risk losing its property tax exemption.

The only advice I have is to ask the church if they would offer space with your CC community if it were a nonprofit organization with a religious and/or educational purpose. Illinois does grant property tax exemption to some educational organizations.

If you wish to re-form as a nonprofit organization, I can help you understand the pros and cons.

Carol Topp, CPA

HomeschoolCPA.com

Save

Save

Should my homeschool group be a nonprofit or a for-profit business?

A woman asks if her Classical Conversations homeschool program should be a for-profit business or a nonprofit organization.

Carol Topp, CPA explains the four differences between for-profit and nonprofits.

Listen to the podcast (11 minutes)

 

Phone Consultation with Carol Topp, CPA

Phone Consultation: A pre-arranged phone call to discuss your questions. My most popular service for homeschool leaders. It’s like having your own homeschool expert CPA on the phone!

Cost: $75/hour to nonprofit organizations.  $100/hour to for-profit businesses. $60 minimum.

Q &A by Email:  I am willing to answer questions by email, but it is very time consuming to read and reply to emails. I charge a reduced rate of $50/hour to read and reply to emails. Minimum $25.

Contact HomeschoolCPA, Carol Topp, CPA, to arrange a telephone consultation.

Click Here to request more information!

Save