Understanding Taxes for a small homeschool business

It’s tax season and I’ve been getting several emails from homeschool business owners, especially Classical Conversations directors, about how to fill out their tax returns.

The IRS has a terrific website called Understanding Taxes that explains how to fill out a simple business tax return.

It’s quite good. I’ve used their simulations when I taught personal finance at my homeschool co-op

Visit these websites to learn how to fill out your Schedule C Business Income and Loss.

Understanding Taxes home page

Simulation of filing a simple business tax return using Schedule C-EZ

Simulation of filing a simple business tax return with a 1099-MISC (this simulation would be helpful for a Classical Conversation tutor who receives a 1099-MISC).

 

You could also try searching Youtube for helpful videos on preparing a business tax return. Here’s one I found:
How to Fill Out Schedule C for Business Taxes He goes over the Schedule C line by line in about 20 minutes.

 

I hope that helps,

Carol Topp, CPA

Save

Save

Tax return for a Classical Conversations homeschool business

We are a new Classical Conversations community set up as a single member LLC. We only had 2 students and so my tutor’s income was below the requirement for filing 1099s. Same for me. However, I saw that I shouldn’t be filing a 1099-MISC for myself. What should I be doing?

And what is considered profit for a CC community?

Esther

 

Thank you for emailing me your question about taxes and your Classical Conversations (CC) business.

As a single member LLC, you are a sole proprietorship and you report your income and expenses from your CC business on a Schedule C Profit or Loss from Business as part of your Form 1040.

All your income from the tuition and fees charged to your customers (i.e. parents) goes on line 1 Gross receipts or sales. In this example the total income is $4,500.

Your payment to your teacher(s) goes on Line 11 Contract Labor.  In this example a total of $2,250 was paid to independent contractors. Other expenses go in the categories listed in Part II of the Schedule C. Other expenses made the total expenses sum to $2,982 as shown on Line 28.

The profit is shown on Line 31> It is calculated  from Gross Income (Line 7 on the form) minus Expenses (Line 28). The profit is what you get to keep (and pay taxes on!) as the business owner. In this example the profit is $1,518. This amount will carried forward to the first page of the Form 1040 to Line 12 Business income or loss.

This Youtube video may help: https://youtu.be/qd5etmtyn9s It’s not specific to homeschooling businesses or Classical Conversations, but it goes over the Schedule C line-by-line in about 20 minutes.

P.S. I am no longer taxing new tax clients, so I recommend you find a local CPA to help you in preparing your tax return. To find a local CPA or accountant I recommend you try Dave Ramsey’s Endorsed Local Providers and Quickbooks Proadvisors. A lot of CPAs and accountants listed on these sites specialize in small businesses.

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

Save

Save

Save

Save

Save

Save

Save

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 reach 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. 🙁

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

Save

Save

Save

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

Save

Save

Save

Save

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

Save

Save

Save

Save

Save

Save

Save

Save

Save

Save