The IRS is on the prowl in 2019!

Every year the IRS Tax Exempt division releases a list of areas and issues they plan to focus on for audits and investigations. The IRS Tax Exempt division calls it their Program Letter. The Exempt Division is the branch of the IRS that grants 501c tax exempt status to nonprofit organizations.

The Charity Law blog discussed the IRS Tax Exempt work plan for 2019.

 

I found the list of things the IRS considers “the highest known priority and emerging risks” to be interesting, especially these two issues that affect homeschool programs, both nonprofit and for-profit:

  • Previous for-profit: focus on organizations formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.
  • Worker classification (misclassified workers): determine whether misclassified workers result in incorrectly treating employees as independent contractors.

 

So if you are converting a for-profit homeschool business to a nonprofit organization, be prepared for some extra questioning and scrutiny from the IRS. You’ll have to file the longer Form 1023 to apply for 501c3 tax exempt status and explain in your Narrative why you are converting to nonprofit status. You will not be eligible for using the shorter IRS Form 1023-EZ.

 

My book, The IRS and Your Homeschool Organization  explains how to apply for 501c3 tax exempt status.

 

 

 

 

 

Additionally, if you are treating your homeschool program teachers or tutors as Independent Contractors, be prepared for the IRS to keep an eye on you and they may open an investigation into your worker classification.

 

 

My book Paying Workers in a Homeschool Organization will be a big help to you in paying workers.

 

 

 

Additionally, the IRS is hiring approximately 40 new revenue agents to process determination applications. Is that good news? More IRS revenue agents should mean both faster processing and increased audits and investigations! Both good and bad, in my opinion.

Carol Topp, CPA

HomeschoolCPA.com

 

Top tax mistakes homeschool business owners make

I’ve talked to a lot of homeschool (for-profit) program directors over the past few years. These people have a huge heart for homeschooling, but many do not understand that when they start their programs, they began operating a business. They don’t see themselves as business owners (but they are!), and so they neglect getting educated about running a business and make a lot of mistakes.

Here are the top tax mistakes I see homeschool for-profit directors make:

  1. Giving themselves a 1099-MISC.
  2. Not understand that they are business owners.
  3. Paying tutors as Independent Contractors but treat them as employees.
  4. Not understanding their tax obligations.
  5. Not being prepared for self-employment tax.
  6. Not being aware of potential penalties for worker misclassification.
  7. Not keeping good records.
  8. Not seeking professional advice before signing an agreement or launching a program.
  9. Not getting tax advice.
  10. Asking Independent Contractors or employees to volunteer their time. That is Illegal in most states.
  11. Not realizing fundraisers are taxable income.
  12. Thinking they can form a nonprofit by filing a piece of paper but not forming a board or drafting bylaws.

I explain a lot of these tax mistakes in my webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to for-profit directors, tutors, co-op teachers and other homeschool business owners! For details visit HomeschoolCPA.com/HSBIZTAXES

 

Additionally my book on  Paying Workers in a Homeschool Organization  explains in detail why tutors should be paid as employees and the risk a homeschool business owner is taking if she pays her teachers or tutors as Independent Contractors.

 

I’m not trying to scare anyone!  Sorry if I did, but maybe it will compel you to change your actions.

I’m not trying to talk you out of being a homeschool business owner, director of a for-profit program, or tutor if you love it.

But I am trying to help you stay out of trouble with the IRS and your state government.

The last thing I want is an audit of homeschool programs or businesses by the IRS or state governments! No one wants the reputation of homeschooling tainted in the eyes of our government. We don’t need that!

 

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders

New tax deduction for homeschool teachers and tutors in 2018!

Congratulations homeschool business owners which may include homeschool co-op teachers, directors and tutors! There is a new tax deduction that you are (probably) entitled to take on your 2018 tax return!

It’s called the Qualified Business Income (QBI) Deduction.

The QBI tax deduction is equal to 20% of your profit from a “qualified business.”

Tutoring and teaching are both a “qualified businesses” if operated as anything except a C corporation.

If your taxable income is less than $157,500 for a single person or $315,000 for married filing joint, you can claim the 20% QBI tax deduction (even if you are one of the not qualified businesses I listed). If your income is more than those thresholds, your deduction will be phased out.

There are some additional restrictions and complications, especially if your business is an S Corporation, pays wages to employees, or if you have several businesses. So consult your tax professional if those situations apply to you.

 The Qualified Business Income Deduction is found on Line 9 of the 2018 Form 1040. so look for it!

Your tax prep software may not calculate the deduction automatically; you may have to answer some questions to trigger the deduction.

This deduction is for business owners, but not for employees.

Need more help preparing your tax return for 2018 this year?

There is a lot to learn about running a business. I don’t mean to discourage you or anyone else away from operating a homeschool business. You provide a valuable service to homeschool families! I am offering this webinar to help you understand the tax implications:

Carol, thank you again for the webinar. It was one of the BEST webinars I’ve EVER attended. If you do hold another one, I would pay for it hands down.  Totally worth the $10! -Denise, webinar attendee

“I actually don’t care for webinars at all – it is not my learning style at all and I struggle to focus, but this one was extremely value and had my attention”. -Mary, webinar attendee

The webinar was recorded and you can access the recording and slide handout at HomeschoolCPA.com/HSBIZTAXES for a small fee of $10.

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

How does the new tax law changes affect homeschool teachers and tutors?

There were a lot of changes to the US taxes in 2018 and the IRS re-designed the Form 1040, so tax preparation in 2019 will be very confusing.

Here are some highlights of the tax law changes that affect homeschool business owners and that includes (nonemployee) teachers at a homeschool co-op, owners of for-profit homeschool programs, and tutors.

Yes, teacher and tutors are business owners! If you accept payment and offer a service (like a class), you are in business and are a business owner. If you teach or tutor as an Independent Contractor, you have a tutoring business!

 

Highlights of Tax Changes in 2018

  •  No more exemptions for each family member. This may hurt large families.
  •  Standard deduction increased to $12,000 S/$24,000 MFJ
  •  Child Tax credit increased to $2,000/child
  •  New Qualified Business Income deduction
  •  New tax forms: 1040 “postcard”
  •  Lower tax rates (12% for most of us)

 

The new Qualified Business Income deduction will help homeschool business owners. You’re going to love it!

The deduction is equal to 20% of your profit from a “qualified” business (sole prop, partnerships, S corp)

If your Taxable Income less than $157,000 Single or $315,000 Married Filing Joint, your business is “qualified.”

Look for this Qualified Business Income deduction on new re-designed Form 1040 Line 9

 


There is a lot to learn about running a business. I don’t mean to discourage you or anyone else away from operating a homeschool business. You provide a valuable service to homeschool families! I am offering this webinar to help you understand the tax implications:

I recorded a webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to tutors, non-employee co-op teachers and other homeschool business owners! You can watch the recording at HomeschoolCPA.com/HSBIZTAXES for a small fee of $10.

Carol, thank you again for the webinar. It was one of the BEST webinars I’ve EVER attended. If you do hold another one, I would pay for it hands down.  Totally worth the $10! -Denise, webinar attendee

“I actually don’t care for webinars at all – it is not my learning style at all and I struggle to focus, but this one was extremely value and had my attention”. -Mary, webinar attendee


I hope that helps,

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders

Where to find the Taxes for CC Directors ebook

 

Here’s how to find my ebook Taxes for Licensed Classical Conversations Directors.
The link is in an updated 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 (DLG) page 54, Appendix M and click on “this document.” 
If you cannot find Appendix M, or the “this document” link” doesn’t take you to the ebook, you may have an older version of your DGL. Please ask you Support Rep for the most recent version of your DLG.

 

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 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 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

There is a lot to learn about running a business, so I recorded a webinar to help you understand your taxes:

I recorded a webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to tutors, directors and other homeschool business owners! You can watch the recording at HomeschoolCPA.com/HSBIZTAXES for a small fee of $10.

Carol, thank you again for the webinar. It was one of the BEST webinars I’ve EVER attended. If you do hold another one, I would pay for it hands down. Totally worth the $10! -Denise, webinar attendee

“I actually don’t care for webinars at all – it is not my learning style at all and I struggle to focus, but this one was extremely value and had my attention”. -Mary, webinar attendee


 

I hope that helps.
Carol Topp, CPA
Helping Homeschool Leaders and Organizations

Can a homeschool program director deduct her child’s tuition on her tax return?

Carol,

I’m a director for a small classical homeschool program. I am required to have all my children enrolled in the program. I see this as a requirement for being a director and therefore a business expense. Can I deduct my children’s’ tuition and fees as a business expense on my tax return?

-T

 

Dear T,

No. The tuition and fees are not a business expense; they are a personal expense. They are not tax deductible as a business expense.

Just because the program you use requires you to have all your children enrolled in the program, does not make those expenses “ordinary and necessary” business expenses allowed by the IRS.

To be a bit ridiculous consider this:

I have to eat in order to stay alive and operate my business, but that doesn’t make my meals eaten at home are a business expense!

I imagine that the homeschool program wants to you to wear clothing while teaching, but your typical street clothes are not  a tax deductible business expense. They are a personal expense.

 

From the IRS:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.

Generally, you cannot deduct personal, living, or family expenses. (emphasis added)

Source: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses

Your children’s tuition is a “family expense,” not a business expense.

Do not deduct it on your Schedule C Profit or Loss from Business tax form.


It is not my intention to scare you or anyone else away from operating a homeschool business. You provide a valuable service to homeschool families, but you do need to understand the legal and tax implications, so I am offering this webinar to help:

I recorded a webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to tutors, co-op teachers and other homeschool business owners! For details visit HomeschoolCPA.com/HSBIZTAXES


I hope that helps,

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

Homeschool business owner under reporting her income

I’m a leader of a small, for-profit classical homeschool program. I have only been recording the amount that I retain after I pay my tutors on my tax return. After reading your website and FB comments, I’m confused. Why do I have to claim all of the money even though I don’t keep it?

-S

 

Dear S,

You, as a business owner, must report all your income om your tax return. Additionally, you can deduct business related expenses, like paying your tutors, insurance, rent, etc.

You asked, “Why do I have to claim all of the money even though I don’t keep it?
Good question!

Short answer: It’s the law. The IRS requires business owners to report ALL their income. Then the business owner shows the IRS all their business-related expenses. The difference is profit and that’s what business owners pay taxes on (and get to keep).

Longer answer: By showing your total income from your business and all your business-related expenses, you prove to the IRS that your business had little or no profit. The IRS won’t take your word for it that your didn’t “keep it.” They want proof of how much profit you had and you give the proof by filling out the numbers on the tax form (Form 1040 Schedule C for businesses).

On your tax form (Schedule C) you should have answered this question: Did you make payments that require you to file Form 1099? with a YES, because you paid your tutors as 1099 Independent Contractors and gave them each a 1099-MISC (I assume).

Then further down on the Schedule C you can deduct what you paid those tutors on Line 11 Contract Labor (or Line 26 Wages if they are employees). Then you can also show any other expenses like insurance, office supplies, etc.


It is not my intention to scare you or anyone else away from operating a homeschool business. You provide an essential service to homeschool families, so don’t stop, but you do need to understand the legal and tax implications, so I am offering this webinar to help:

On Monday January 21, 2019 at 8 pm I will be giving a live webinar on Tax Preparation for Homeschool Business Owners.  The webinar is free for the live version. For details visit HomeschoolCPA.com/HSBIZTAXES


If you did not prepare your tax return this correct way, you may need to amend your prior years’ tax returns, especially if you failed to report all of your income. You can amend up to 3 prior years. The IRS can fine taxpayers for under-reporting income. They take that very seriously!

But if you correct prior year tax returns now, the IRS usually waives any fines and penalties.
You may not owe any additional tax, so don’t panic!. I cannot tell if you will owe more tax (or get money back!) until I would see your tax return and recalculate your Schedule C.

Did you prepare the tax return yourself or use a professional tax preparer? If you used a professional tax preparer, go back to him/her with all your records for the past 3 years and see what they recommend that you do.

 

I hope that helps!

Carol Topp, CPA
HomeschoolCPA.com

Webinar: Tax Preparation for Homeschool Business Owners


 

Taxes! Oh my! Tax returns will be a doozy with massive tax law changes and the redesigned Form 1040.

But tax preparation for homeschool business owners is even more complex than regular taxpayers.

Fortunately, HomeschoolCPA is here to help. I recorded a webinar.

 Taxes for Homeschool Business Owners

$10.00 includes unlimited viewing and a handout of slides

Here’s what the webinar covers:

  • Highlights of tax changes for 2018
  • IRS tax forms for a sole proprietorship: Schedule C and SE
  • Self-employment tax
  • How to pay yourself
  • Tax deductions common to homeschool business owners
  • New tax deduction for 2018! Look out for this one. It’s terrific!
  • The new redesigned IRS Form 1040
  • Two sample tax returns. Yes, I walk you through two sample tax returns, so you can see how everything looks. 🙂
  • Common mistakes to avoid

Carol, thank you again for the webinar. It was one of the BEST webinars I’ve EVER attended. If you do hold another one, I would pay for it hands down.  Totally worth the $10! -Denise, webinar attendee

Carol, thank you for doing this for us! I am not a numbers person at all, and still found this webinar very interesting and helpful.”-Anne, webinar attendee

“I actually don’t care for webinars at all – it is not my learning style at all and I struggle to focus, but this one was extremely value and had my attention”. -Mary, webinar attendee


This webinar is for:

  • Paid teachers at a homeschool co-op
  • Tutors getting paid as Independent Contractors
  • Directors/owners of homeschool programs such as CC directors running a community
  • Music teachers, tutors, coaches, etc. running their own businesses
  • Business owners selling services to the homeschool marketplace

The webinar recording costs only $10. You will gain a lot more than $10 worth of information, I promise.

For $10 so you get:

  • Access to the webinar video to re-watch as often as needed (just save the link!)
  • Download of the webinar slides
  • Notification of upcoming webinars for homeschool business owners and nonprofit leaders

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

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.