How can a nonprofit board receive benefits (properly)?

A homeschool organization sent me their bylaws to look over. They had two conflicting statements about offering compensation or benefits to their board members, especially the officers (the officers of a nonprofit organization are President/Chair, VP, Secretary and Treasurer).

Article 4 Section 1 Board members shall receive no compensation (other than reasonable expenses) for their service on the Board.”

Article 5 Section 4 Officers of the Board are eligible for benefits such as discounts, retreats and/or priority registration as well as other meeting expenses deemed reasonable by majority vote.

So which is it? Are officers allowed compensation/benefits or not? Tuition discounts are taxable compensation according to the IRS (unless they are “insignificant“).

Also the benefits are approved by a “majority vote.” Majority of whom? The board? This organization has no voting members except the board. And a nonprofit board cannot vote themselves benefits because that is a conflict of interest and private benefit which is forbidden by the IRS (if excessive).

I understand the desire to thank hard-working board officers, but be careful that it doesn’t become taxable income or a conflict or interest or worse private inurement which is forbidden by the IRS for 501(c)(3) organizations.

Here’s what I recommend:
1. Change the wording of Article 5 Section 4 to read Officers of the Board are eligible for  benefits (such as insignificant discounts, training (retreats and conferences) and/or priority registration) deemed reasonable, but not significant enough to be taxable income, by majority vote of the non-officers of the board or recommended by an independent committee.

and then

2. Hold a board meeting where the officers leave the room and the remaining board members vote on what benefits the officers will receive that year. That means you need to have a large enough board to do this. And it needs to be done every year.

Or

appoint an independent committee (no one on the committee is related to any of the officers) to make a recommendation. The board votes to accept the committee’s recommendation (but without the officers allowed to vote since they will personally benefit).

These changes in their bylaws and having other board members vote for the officer benefits will keep the organization from having a #1) conflict of interest and #2) the appearance of private benefit. It also means the officers are being thanked for their service without receiving any taxable income.

 

If your organization needs help in understanding how to thank your board members (properly), read

or my new Homeschool Organization Board Manual. It’s a template for you to create your own board manuals as a place to store important papers and policies.

Carol Topp, CPA

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Compensation to homeschool board members is taxable income

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This is an excerpt from my new book, Paying Workers in a Homeschool Organization-2nd edition.

Compensation to board members is taxable income

I was recently reviewing the bylaws for a homeschool organization that stated,

Members of the Board of Directors may receive reasonable compensation for their services and may be reimbursed for actual expenses incurred in the maintenance of their duties.

A homeschool organization can compensate your board for their service, but compensation to board members is taxable income. If the board member is an officer (chair, vice chair, secretary, or treasurer) they must be paid as employees. Other board members who are not officers can be paid as independent contractors and given a Form 1099-MISC.

Did you catch that? If officers are compensated, the IRS laws* say they must be paid as employees. That means creating paychecks, paying payroll taxes (Social Security and Medicare), preparing W-2s and quarterly filings with the IRS and your state, and may mean unemployment and workers compensation taxes too!

Does your homeschool group really want to deal with payroll? It can become an excessive burden on a treasurer or expensive if your organization hires a bookkeeper or payroll service. If you do choose to compensate your board members, I highly recommend using a payroll service.

*“Exempt Organizations: Compensation of Officers” https://www.irs.gov/charities-non-profits/exempt-organizations-compensation-of-officers


I spent at lot of time doing research on this book so that homeschool leaders will know if they are paying their volunteers, board members, and workers legally and correctly.

I hope the book is helpful and lets you sleep at night not worrying about an IRS audit of your worker classification.

Carol Topp, CPA

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Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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Can a homeschool group pay a volunteer?

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This is an excerpt from my update book, Paying Workers in a Homeschool Organization

“Can we pay our homeschool co-op director? She works so hard.”

Yes, your homeschool organization can pay someone who works for the organization, but the pay must be reported to the Internal Revenue Service (IRS). The reporting responsibility will be on both the homeschool organization and the worker. Additionally, the organization will have to determine of the worker is an employee or an independent contractor. Other chapters in this book explain the required reporting and worker classification.

Instead of paying a worker, your homeschool organization can show appreciation to a volunteer in a variety of ways, but they may have tax consequences such as:

  • Reduced fees or tuition. Reduced tuition for classes or for a homeschool co-op fee is a nontaxable fringe benefit if it is insignificant (more on that in the book). If the tuition reduction is significant the value of the tuition is taxable income to the volunteer.
  • Gift cards, but they could be taxable income to the recipient if the cards are a replacement for payment for services and not a true gift.
  • Non-cash gifts such as flowers, books, a coffee mug or chocolate are excellent ways to express appreciation and are tax-free to the volunteer.

I’ll discuss each of these types of compensation (reduced fees, gift cards and non-cash gifts) to a volunteer in detail … (you’ll need to buy the book to read the details!)

Carol Topp, CPA


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Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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Is this a gift or compensation to a homeschool leader?

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I just purchased your e-book, Paying Workers in an Homeschool Organization.   It only briefly touched upon the issue I am most interested in, and I am wondering if you have additional resources to answer my question.

Our Steering Committee decided years ago to provide certain gifts and perks to our chairman whom they were in danger of loosing due to her family suffering financially at the time.   The financial hardship has passed, but the gifts and perks remain. Currently, our chairman receives these annual benefits:

  1. $1,000 in gift cards (usually grocery and gas gift cards)
  2. $700 in classes for her children – these are the fees paid directly to the independent contractor teachers
  3. $100 -200 in waived registration fees (These are fees that the co-op charges members.)
  4. $160 in free pizza/drinks/snacks
  5. reimbursements for costumes and drama-related costs for her children (all other members pay for these)
  6. $300-$500 in cash gifts collected from members and given directly to the chairman.

She is the only one to receive gifts and perks out of the co-op budget.

This has been a very difficult conversation at our co-op because our chairman does do an enormous amount of work.

Thank you!

Anne in PA

 

Anne,

When I read the list of “perks” your chairman receives I was shocked! Wow!

Most board members are happy with flowers or a small gift card.

According to the IRS,  an officer who is paid is an employee. That means the gift cards, tuition discounts, and cash she received should have been reported to her on a W-2 and your group was supposed to pay employer taxes (SS/Medicare) on her “wages” and file quarterly tax forms with the IRS!

When you pay independent contractor teachers on her behalf, you are paying her personal expenses. The IRS considers payment of personal expenses as taxable compensation and it needs to be reported on a W-2. See  http://www.irs.gov/pub/irs-tege/eotopici93.pdf

My recommendation is to stop these excessive payments immediately. The IRS calls this “excess benefits” and can impose penalties and a 25% tax on what they deem “excessive.”

Here’s an excellent article on excessive benefits (they consider paying personal expenses for members of an officer’s family to be “excessive.”)
http://www.nolo.com/legal-encyclopedia/reporting-excess-benefit-transactions-the-irs.html

Here’s what they recommend:

If your nonprofit discovers an excess benefit transaction with a DP (disqualified person; i.e. , an insider or leader), it should make good faith efforts to correct it. To do this, you must have the disqualified person repay or return the excess benefit, plus interest, and then adopt measures to make sure the same situation doesn’t occur again. The IRS will take into account these efforts in deciding what penalties to impose and especially whether to revoke the nonprofit’s tax exemption. (emphasis added)

You can, of course, start paying her a salary that she will report as taxable income to the IRS. My new book Paying Workers in a Homeschool Organization can help with that!

Carol Topp, CPA


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Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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Compensating board members can be troublesome!

man_with_bylawsI was recently reviewing the bylaws for a homeschool organization that stated,

Members of the Board of Directors may receive reasonable compensation for their services and may be reimbursed for actual expenses incurred in the maintenance of their duties

The board decided to pay its members for serving on the board. This board also selected its own members. There was no election or vote by the general membership on who served on the board.

It seems like a nice thing pay board members, right? They probably put in a lot of time and effort to run this homeschool group. What not pay them a bit for serving?

The IRS doesn’t like it.

A homeschool organization can compensate your board for their service, but compensation to officers is taxable income and the board members must be paid as employees. Other board members who are not officers can be paid as independent contractors and given a 1099-MISC.

Did you catch that? If board members are compensated, the IRS laws say they must be paid as employees. That means creating paychecks, paying payroll taxes (Social Security and Medicare), preparing W-2s, quarterly filings with the IRS and your state, and may mean Unemployment and Workers Comp taxes!

Does your homeschool group prepared to manage payroll? My new book Paying Workers in a Homeschool Organization can help with that!

Also because this board appoints itself, it is self-dealing to vote itself compensation. This is what the IRS calls private benefit or inurement and it is forbidden by the IRS. Your organization could lose its tax exempt status if you practice inurement or too much private benefit. The IRS is serious about this!!

What counts as compensation? Here’s some guidance from the IRS

1) salary or wages
2) contributions to pension and profit sharing plans
3) unpaid deferred compensation
4) payment of personal expenses
5) rents, royalties or fees
6) personal use of organization’s property or facilities

Look at  4) payment of personal expenses, such as paying a hired teacher on behalf of the board member, is taxable compensation.

Reimbursement of expenses is OK, but compensation of board members for their service is taxable compensation.

My advice to this homeschool group was to stop paying board members compensation for serving on the board. Paying board members is complicated, requires they be paid as employees, and is probably illegal for this self-appointed board.

Carol Topp, CPA

 


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Paying Workers in a Homeschool Organization-2nd edition

$9.95 paperback
130 pages
Copyright 2017
ISBN 978-0-9909579-3-5

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