Can a homeschool co-op have independent contractors and follow the IRS guidelines?

Hi Carol!

Are you aware of any homeschool co-ops/tutorials that have hired teachers as independent contractors and do it in a way that follows the IRS guidelines?
Thanks!
Lauren

Lauren,

I am aware of a lot of homeschool co-op and tutorials that pay teachers as Independent Contractors. Are they following the IRS rules?

Maybe. It depends. Read on…

After a lot of research into IRS rulings and US Tax Court cases concerning the classification of teachers (usually college professors), I learned that one of the factors that weighed heavily in the decision (employee or Independent Contractor) was:

Does the worker provide the primary activity of the organization.

This was really important in the IRS and tax court decisions.

Case 1: employees: I spoke to one homeschool leader who ran a homeschool tutorial program with 12 teachers, all paid instructors. There were no volunteer teachers. Those teachers are providing the key activity of the business. Without them, there would be no homeschool tutorial program. Those teachers are employees.

Case 2: Independent Contractor: On the other hand, I spoke to a homeschool co-op leader who had 15 parents volunteering as teachers and one paid outside person to teach one class. This person was very independent (she had an established tutoring business, picked her own curriculum, received no training or benefits from the co-op, brought in her own supplies, and many other factors).  She was treated as an Independent Contractor. Her services were not the key activity of the co-op; what the volunteer parents provided was the key activity of the co-op. The co-op could continue to exist if that Independent Contractor teacher was unavailable.
This co-op did everything they could to avoid controlling their Independent Contractor teacher. They also has a written agreement and she invoiced the co-op for her services.

But just to be sure, they requested I write a letter clearly stating the facts of their situation and my determination that the outside teacher was correctly classified as an Independent Contractor. It’s called a comfort letter.

My letter, as the opinion of a tax professional licensed to practice before the IRS, can serve as a reasonable basis if the IRS ever questions the homeschool co-op. This reasonable basis will help the homeschool co-op avoid any penalties and back taxes from the IRS.

See how the facts and circumstances of each case can be different? There is not bright line test in worker classification. The determination if your homeschool program teacher is an employee or Independent Contractor depends on the facts and circumstances of each case.

If you would like help determining your teacher’s status or have me write a “comfort” letter, contact me. We’ll set up a phone call where I ask you a bunch of questions. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps.

My book Paying Workers in a Homeschool Organization is a great place to start to understand how to properly classify your workers.

I released a podcast on creative ways that homeschool co-ops hire teachers without paying them as employees. It runs about 9 minutes long.

Creative Ways to Run Your Co-op Without Employees

I hope that helps,

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

Is the rent our homeschool group pays to a church a donation?

Our homeschool co-op meets at a church, but they do not want to bill us for rent. The co-op gives a  gift/donation to the church as a thank you and so the church records it that way for their tax purposes.  Do we need to classify our “donation” to the churches as rent?
We have been informed by the church that this would affect their taxes and financial recordings since they are classifying our payment as a donation received. The last thing we want to do is cause problems for the churches sharing their space with us. Please advise/explain.
Kelly
Let me start off by saying that simply calling what you give to the church a “donation” is a simply renaming the payment. Calling your payment a donation does not change the fact that you are giving money to this church in exchange for use of its space. Even if they do not bill you, it is payment for use of space and not a donation. Be honest. Call it what it is in your records: rent. What the church wants to call it is up to them.
I’m not alone in my opinion about this. Attorney and CPA, Frank Sommerville, says

“Many churches try to disguise rents by using other terminology or by claiming that the other organization is simply giving a donation to the church. Other times the church calls it a “cleanup fee” or tells the tenant to pay the janitor directly for his services. None of these name games work. If any amount is paid by the other organization to the church or the church’s workers, then the IRS and state taxing authorities will likely treat it as rent paid to the church.”
Source: Frank Sommerville, JD, CPA https://www.wkpz.com/content/files/Use%20of%20Church%20Facilities%20by%20Outside%20Groups.pdf

But the church is worried about taxes, so let’s address that. The church is worried about two things:

  • IRS federal income tax exempt status as a 501(c)(3) religious organization
  • Local property tax exemption.

Let’s address each concern:

IRS federal income tax exemption.
The church has 501(c)(3) tax exempt status as a religious organization and probably also charitable and educational purposes as well. So long as they stick to religious, charitable, and educational activities their 501(c)(3) status is not in jeopardy.

But renting space is a commercial activity and not religious, charitable or educational. So the IRS considers income from renting space as “unrelated business income” and will charge an unrelated business income tax called UBIT on the profits from the rented space.

Fortunately, there are exceptions to UBIT. Three factors will determine whether the church would owe any UBIT on rental income (See IRS Pub 598 ) :

  1. Whether the group renting the church space helps the church fulfill its mission in some way. There is no UBIT if the tenant’s activities helps the church meet its mission. Your homeschool co-op, if religious in its purpose, helps the church accomplish its mission and the rent you pay would not be an unrelated source of income for the church.
  2. Whether the church is charging fair market value for the space. If they are charging above fair market value, there is a profit and therefore tax to pay.
  3. The church has a mortgage or other debt financing on the building (called debt-financed property by the IRS). If the building is debt financed property, the rental income is unrelated business income and therefore taxable.

If the church determines they have unrelated business income, they will have to file a Form 990-T to declare the unrelated business income. But they are also allowed to deduct any expenses related to the rental income such as utilities, custodian care, etc. Typically the expenses  outweigh the income and so no tax is owed. But the church needs to file the 990-T to prove that don’t owe any tax.
Thanks to http://www.corestrategies4nonprofits.com/nonprofit_core/Go_Ahead_-_Rent_Your_Extra_Space

Kelly’s homeschool group’s purpose (religious and educational) helps fulfill the church’s mission and does not threaten its 501(c)(3) status. The church, if it has a mortgage, may need to prepare a IRS Form 990-T and may (or may not) owe UBI tax on the rental income. So, in other words, it is the church’s mortgage that could cause UBIT, not the fact that Kelly’s group is paying rent to use their space.

Property tax exemption:
The church may be concerned about its property tax exemption from the state or county. In general if the tenant’s mission matches the church’s mission (religious, charitable and/or education), the church’s property tax exemption is not jeopardized.

BTW, if your homeschool group is not a nonprofit organization (meaning it is a for-profit business), using church property could endanger the property tax exemption of the church. The loss of property tax exemption can be in whole or in part; it depends on local and a state property tax exemption laws.

Kelly’s organization is a nonprofit with religious, charitable and educational purposes. It ‘s use of the church building does not threaten the church’s property tax exemption.

Conclusion:
Kelly could go back to the church and determine the basis for their concern. In all likelihood things will continue as usual with Kelly’s organization making a payment to the church as they see fit. I recommend that Kelly record this in her group’s bookkeeping as “rent.” How the church wishes to record it is ultimately up to them, but in my opinion (and other professionals’ opinions), it is not a donation; it is payment for use of space.

Hopefully the church will be honest to the government and prepare the Form 990-T, if required.  This is rendering to Caesar what belongs to Caesar (Matt 21:22). Whether or not the church will owe UBI tax on this money is dependent on if they have a mortgage on the building and the amount of expenses they have.

Carol Topp, CPA

Save

Save

Save

Save

Simplify your homeschool group fees (please!)

Carol,

Our all volunteer homeschool co-op charges fees for several things:

  • A $20/family registration fee.
  • A $12/family fee to pay a cleaning crew for cleaning.
  • The building usage fee is $40/student/school year.
  • A $4 PayPal fee per transaction.

Then some of the class teachers charge a supply fee or require the parents to purchase books, etc.
Is there a way to simply these fees?
Emily

 

Emily,

I’ve seen lots of homeschool groups with complicated fee structures. There are separate fees for the facility, the supplies, the insurance, the website, etc. The list of fees on the parents invoice is 5-6 separate lines!

Something like this is invoice overkill!

You don’t need to be this complicated with all the separate fees!

Most preschools, private schools, colleges,  etc. include all their fees into one tuition fee charged to parents. (Okay, I  know that colleges love to charge lots of fees for supplies, etc. and then can claim they are not increasing tuition!)  The school adds up all the expenses to operate their program and charge the parents enough to cover those expenses (that’s why a budget is so important). They lump everything into one bill to the parents called “tuition.”

Instead, just lump it all the fees into one fee, call it student fees or “tuition,” if you like. The parents do not need to see all the details of what goes into running the organization; that’s what the board does. The budget is the place to list the expenses and see if the tuition charged is enough to cover all the expenses.

Simpler invoice to send to parents. All fees lumped together.

P.S. About the Paypal fee you’ve been charging…Paypal forbids you tacking on an extra charge to cover their fee. It’s in the User Agreement your organization agreed to when you signed up for a Paypal account. It says, “You agree that you will not impose a surcharge or any other fee for accepting PayPal as a payment method.” So just roll that fee into your total fee charged to parents.

Why You Can’t Charge Clients Paypal Fees + What to Do About It.

Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

Save

Save

Recording scholarships in homeschool group bookkeeping

 
Hi Carol,

How are scholarships recorded in our homeschool co-op’s bookkeeping? We charge an amount for classes but would like to provide a scholarship and return the full amount of tuition or provide a partial scholarship back to the family. For example, we collect the full tuition payment due but then write a check with a certain scholarship amount back to that same family. Is that considered simply as an expense?

Thank you so much!
Sharon

 

Sharon,

What you call a scholarship is really a tuition discount.

The best way to handle this is to give the discount BEFORE the family pays anything. Then the payment is recorded as income (although smaller income than originally budgeted).

If instead you wish to return some of the tuition a family pays, then you record it as a reduction income. We accountants call it a “contra-income” account. Sort of a negative income account. It’s not an expense; it’s a reduction in income.

Something like this:

Income

Tuition Payments: $5,000

Tuition reduction to needy family: ($500) numbers in parentheses are subtraction or negative numbers

Total Tuition Collected: $4,500

So, it’s not recorded as an expense, even if you write a check. It’s recorded as a contra-income (or a reduction in income) transaction.

I cover this topic and many more in my book, Money Management in a Homeschool Organization. You might find it helpful.

Carol Topp, CPA

Save

Returning homeschool co-op supplies to parents

Carol,
How should our homeschool co-op should handle classes where there are nonconsumable items purchased?  We had a class where Lego kits were purchased for a class.  Students shared kits and we charged a small fee.  Now parents think they should get half of the kits or that future classes should have to pay for the kits and they receive a credit each time.
We have never done that with any classes in the past.  It has always just become property of the co-op.  It sounds like it would be a bookkeeping nightmare.
Thanks for your input,
Becky  in KY

Becky,

You’re right, tracking the LEGO kits sound like a bookkeeping nightmare.  I like to keep things simple but as fair as possible.

We had a similar situation in my homeschool co-op with Spanish books.  The teacher bought a curriculum to use and was planning on spreading out the cost of the teacher manuals and CDs over two years of students. It took some guess work to figure out how many students she would have this year as well as future years.  In the end we decided  that this year’s students would end up paying for a portion of the teachers books and CDs.  The rest of the cost was absorbed by the co-op as a whole. The co-op then owned the teacher books and CDs. Future Spanish classes were charged a small supply fee so that the co-op could recoup the cost of the teachers books and CDs.

I think the co-op should own non consumables, not the individual parents. Sounds like that’s how you have done it in the past. Parents pay a supply fee, but are not entitled to the equipment afterward nor a credit from future students.

So maybe instead of charging the current students full price for nonconsumables, your co-op could try to save up some money over a few years and purchase nonconsumable equipment that will be owned by the co-op. Or have a fundraiser to buy the equipment.

Carol Topp, CPA

Starting a Homeschool Co-op with a Friend

 

Is it a good idea to start a homeschool co-op with a friend?

Carol Topp, the author of  Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out explains the pitfalls to avoid when starting a co-op with a friend.

Listen to the podcast (10 minutes)

FEATURED PRODUCT from HomeschoolCPA:

Homeschool Co-ops:  How to Start Them, Run Them, and Not Burn Out

Have you ever thought about starting a homeschool co-op? Are you afraid it will be too much work? Do you think you’ll have to do it all by yourself? Starting a homeschool co-op can be easy! This book Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out will give you ideas, inspiration, tips, wisdom and the tools you need to start a homeschool co-op, run it and not burn out!

Click Here to request more information!

Homeschool or microschool?

I have been a teacher at a small private Christian School for many years. I have been asked by 15 families to homeschool their children, beginning in the fall. I have agreed. I purchased your books and read them (so helpful!!) I have done quite a bit of work already, but after filling out half of the 501(c)(3) form, have decided that I really want to make sure this is all done right and am requesting your help.
-S

 

Dear S,

Homeschooling the children from 15 families is not really homeschooling. Perhaps forming a microschool be a better option.

What’s a microschool?

According to Meridian Learning, a resource and advocacy organization for grassroots micro-schools,

a micro school is a purposely small school led by a trained professional and focused on meaningful, sustainable, whole student learning.

Microschools are also called the modern-day one-room schoolroom.

Microschools are not the same as homeschool co-ops, tutorials or programs. Micro schools are registered schools in their states and meet the compulsory attendance requirements of the state. Instead, homeschool programs supplement the main teacher, the parent, with classes and extra curricular activities, but the students are homeschooled under their state laws for homeschooling.

It’s a lot of work to set up a microschool so learn more about starting a running a micro school at Meridian Learning. Meridian will be hosting virtual training sessions this summer (2017) on topics such as:

  • Teacherpreneur
  • How to Start a Microschool
  • Montessori for Business

I will be presenting information at the Teacherpreneur 101 and How to Start a Microschool classes.

Also, please visit this Facebook page on Grassroots Microschools to meet other people running microschools.

I’m committed to helping homeschool leaders, but sometimes other options may work better for some people. I hope S. finds a program that meets the needs of the students and parents.

Carol Topp, CPA

Save

Save

Homeschool Treasurers: Do this before giving your board a financial statement

Homeschool treasurers: before you prepare a financial statement for your board meeting you should reconcile your bank account!

Why is reconciling bank accounts so important?

Vickey Richardson of FreeChurchAccounting.com explains,

 I have discovered with my bookkeeping business that reconciling accounts are not very high on some organization’s to-do list. When accounts are not reconciled … financial statements are usually NOT accurate.

REMEMBER…before generating your financial statements, there is a process you should go through to ensure the accounting reports you give your pastor, treasurer, or governing council are accurate and complete.

One of the most important steps is the bank reconciliation!

See how to reconcile your bank account and additional steps you should take BEFORE you start on your monthly, quarterly, or annual reporting …

Bank Reconciliation First then Financial Statements

(click for Vickey’s detailed steps )

I completely agree with Vickey. When I see regular bank reconciliations, the financial statements are almost always correct. When a organization does not reconcile their accounts, the financial statements are usually a mess.

Vickey also reminds us that credit card statements need to be reconciled too! And so do PayPal accounts. A credit card or PayPal account is really just a type of bank account with inflows and outflows. So reconcile them monthly as well.

 

Carol Topp, CPA

Save

Save

Save

Creative Ways to Run Your Homeschool Co-op Without Employees

So you really don’t want your homeschool co-op to hire teachers as employees, but how can you run your group without them? Carol Topp, the HomeschoolCPA , offers a few creative ways to run a homeschool co-op without hiring employees or dealing with payroll.

Listen to the podcast.

Paying Workers in a Homeschool Organization

Are you paying workers in your homeschool organization? Can a volunteer be paid? Should a worker be treated as an employee or independent contractor? Do you know the difference?

Homeschool leader and CPA, Carol Topp, has the answers to your questions in her book Paying Workers in a Homeschool Organization.

This 130 page book covers paying workers as employees or independent contractors. There are also chapters on paying volunteers and board members. It includes sample forms, tips and advice to help you pay workers in accordance with the IRS laws to help your organization pay their workers correctly. Written specifically for homeschool organizations.

Click Here to request more information!

Save

Save

Can my homeschool group collect money now that’s for next year?

 

Many homeschool groups collect deposits in the spring for next fall’s programs. This helps with determining how many families will be returning. But how should these early deposits be recorded in a homeschool group’s bookkeeping? Carol Topp, CPA the HomeschoolCPA offers some ideas.

 

Listen to the podcast

In the podcast Carol mentioned a handout that explains how to record early deposits in accounting software like QuickBooks.

Here it is: Deferred Revenue in QuickBoooks (pdf)

Do you have more questions about managing the money in your homeschool organization?

MONEY MANAGEMENT FOR HOMESCHOOL ORGANIZATIONS: A GUIDE FOR TREASURERS

  • Does your homeschool group manage their money well?
  • Do you have a budget and know where the money is spent?
  • Do you know how to prevent fraud?

This 115 page book will help you to open a checking account, establish a budget, prevent mistakes and fraud, use software to keep the books, prepare a financial statement and hire workers. Sample forms and examples of financial statements in clear English are provided.

Save

Save

Save

Save

Save