Can a homeschool group deduct tuition from a teacher’s pay?

A homeschool program charges $2,300  per student per year for tuition. Many of the teachers in the program also have their children enrolled in the program.

The leader, Lauren, was deducting the amount of tuition owed from the teacher’s pay and reporting only the difference that she actually paid the teacher.

For example:

Teacher’s earnings: $4,000

Tuition that the teacher owed: $2,300

Teacher’s paychecks: $1,700 ($4,000 less $2,300)

Additionally, Lauren was filing the teacher’s W-2 (or 1099-MISC) and reporting wages of only $1,700, but the true earnings were $4,000.

I advise that homeschool organization DO NOT net the teacher’s pay and her tuition owed like this!

Here’s why:

Picky CPA reason: This netting (subtracting the amount paid to the teacher by the tuition she owed) masks the true amount of teacher pay and the true amount of tuition received in your bookkeeping. The homeschool leadership needs to know the total income from tuition and the total expenses paid for teachers. Netting them masks the true income and true expenses. Additionally, the total amounts of income and expenses must be reported to the IRS (usually on Form 990 or 990-EZ).

More important reason: Taxes! 

The teacher’s payments for her services is taxable earned income. But her child’s tuition is a personal  expense and not tax deductible.

I recommend that the teacher should be paid the full amount earned (in my example, $4,000) and in a separate transaction, she should pay her tuition to Lauren’s homeschool program.

Lauren was advised that she will need to amend the W-2s she gave to her teacher to correct this mistake. This will be an unwelcome surprise to the teacher, but it’s the correct, legal amount to report.

I know it seems like extra work and more complicated, but netting or offsetting the two transactions could distort the total amount of compensation the teacher needs to report to the IRS. It’s mixing taxable income with a non-tax-deductible personal expense.

That’s called tax evasion and the IRS doesn’t take kindly to tax evasion.

Cover Money Mgmt HS OrgFor more information on paying workers and correctly recording transactions in an accounting system, you may find my book, Money Management in a Homeschool Organization, helpful.

 

Carol Topp, CPA

 

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

Update to Paying Workers in a Homeschool Organization

 

I released the 2nd edition of my book Paying Workers in a Homeschool Organization in November 2016, 11 months  ago.

Now, less than a year later, it needs an update. Several events occurred that required me to research the issue of worker classification for homeschool organizations. As a result of my research, I have made several changes to the book.

The update is significant enough that I’m calling it the 3rd edition!

 

The paperback book will be unavailable for a short time while it is getting updated. I expect the paperback and Kindle versions to be ready by October 15, 2017.

Update (October 13, 2017): The paperback version has been updated. The Kindle update should be completed before November 1, 2017.

The ebook version (in pdf) is available now.

Wonder what changed? Or maybe you bought an earlier version of the book and you want to know what’s different.

I created a document explaining what was added or eliminated from the book between the 2nd and 3rd editions. I clarified when a teacher should be paid as an employee and added some additional Sample Agreements including an employment agreement.

Summary of Changes to Paying Workers 3rd edition (click to open the file).

Carol Topp, CPA

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Background checks for homeschool organizations

A homeschool leader on the Homeschool-Life Leaders Forum asked,

Could you share what companies you use to do background checks for your organization?

 

Here are some of the companies that homeschool groups use for doing background checks on employees and volunteers:

Protectmyministry.com

We have used ClearStar.net for several years. They charge $7.95 for a basic criminal background check. Our members can fill in their own information, so we don’t have to deal with paperwork and shredding personal information.

We use Federal Background Services. very reasonable and efficient

My co-op uses SecureSearchPro.com. They charge us about $14/check. They customized our background search to fit our specific needs. They bill us on a monthly basis. I really like them, they are easy to use, members fill out an online form so I never have to gather their personal information.

 

Many states now require background checks on any individuals working with children. You church host may require background checks as well. So the companies mentioned above may be very helpful to you in running your homeschool programs.

 

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders

Need advice when hiring your first employee? Discount program available to nonprofits.

Hiring employees can seem like a taunting task. My book Paying Workers in a Homeschool Organization can help a lot, but if you want extra services, consider contacting a service like HR Solutions Partners.

The HR Solutions Partners discount program at TechSoup provides human resources support services to eligible nonprofit organizations, charities, and public libraries throughout the United States.

With minimal experience, you can use HR Solutions Partners services for support in training employees, administering payroll, measuring employee performance, and more.

I’ve not used them, so I cannot vouch for their services, but it can’t hurt to call and talk to them.

Carol Topp, CPA

Paying Workers in a Homeschool Organization 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.

$9.95 paperback

$3.99 ebook

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Recording of Business Failure in the Homeschool Marketplace webinar

Yesterday I presented a webinar “Business Failure in the Homeschool Market that many of you (about 90!) attended.

 

Here’s the link to download the recording of the webinar.
The webinar lasted 2 hours because of all the questions asked, so it may take a few minutes to download.

 

Here’s a handout of the information I discussed.

 

We talked about
  • What triggers an IRS audit into worker classification
  • Factors to determine independent contractors or employee status
  • Consequences of misclassification and IRS programs to avoid penalties
  • What options are there for a homeschool co-op or academy
  • Are homeschool tutors or teachers at risk

I referenced my book Paying Workers in a Homeschool Organization which may be helpful to many of you.

 I also mentioned that I offer a Worker Classification determination service if you need help determining if your workers are independent contractors or employees.

I’m happy to help and relieve any anxiety you have about this confusing topic.

Carol Topp, CPA

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What are the consequences of misclassifying a worker?

In the news and social media recently has been the sad story about a popular service offering classes for homeschool students having to close. In late December 2016, Landry Academy announced “It is with much sadness that we close the doors of Landry Academy.”

I do not know the details of their unfortunate situation, but it seems that there was an IRS requirement for Landry Academy to reclassify their teachers as employees, rather than independent contractors.

You may be wondering: What are the consequences of misclassifying workers?

Here’s what I tell business owners, nonprofit leaders, and anyone else hiring workers:

IRS Penalties

Under Internal Revenue Code section 3509 the penalties for worker misclassification include:

  • Paying a portion of federal income tax (1.5% of payroll),
  • Employer (100%) and employee (20%) shares of FICA taxes
  • Federal unemployment compensation taxes (FUTA).
  • In addition penalties for missed deposits (10%) and withholdings (20%) can be assessed.

Additional penalties include:

  • $50 for each Form W-2 that the employer failed to file because of classifying workers as an independent contractor.
  • A Failure to Pay Taxes penalty equal to 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.

Other Penalties

That’s pretty bad when you ad it all up, but the list of consequences goes on to include:

  • Penalties for failure to file state and local income tax withholding
  • Penalties due to unemployment insurance shortfalls
  • Worker’s compensation violations
  • Improper exclusion from benefit plans such as pension, retirement plans, health insurance, paid leave, severance pay, etc.

Here’s a long list of The Consequences of Misclassifying Your 1099 Contractors

Scared yet? You probably should be.

Worker misclassification is a serious issue and can cause significant financial hardship and has caused several businesses to close.

Here’s help

My book Paying Workers in a Homeschool Organization can help clear a lot of confusion, but perhaps you want to discuss your particular situation in a private, individual phone consultation.

I offer phone consultations to help you determine if your homeschool organization’s workers are employees or independent contractors. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps.

To request a consultation, please contact me. I’m happy to help and relieve any anxiety you have about this confusing topic.

Carol Topp, CPA

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Webinar on business failure in the homeschool market

I am always saddened to hear about business failure in the homeschool market. I feel pain for the business owner, their employees and their customers.

  • How can this happen?
  • Can it be avoided?
  • What can a customer do if they have lost a lot of money?
  • What lessons can a homeschool business or homeschool co-op learn from others’ failures?
  • Are homeschool teachers and tutors at risk?

I’m going to answer all these questions and more during a live webinar hosted by Tammy Moore of Virtual Homeschool Group 

Webinar: Business Failures in the Homeschool Marketplace

 

Date: Saturday January 14, 2017

Time: 2:00 pm ET, 1:00 pm CT, 12 noon MT and 11:00 am PT. The webinar will last about 60 minutes.

Cost: Free

Topics:

  • For parents: How can parents avoid losing money?
  • For homeschool businesses and nonprofits: Could it happen to us?
  •  IRS audits, penalties and safe harbor provisions
  • Worker Classification: General guidelines and possible solutions
  • For homeschool teachers and tutors: Are you at risk?

Join the webinar  here

You’ll need to download the webinar application on your computer or mobile device before the webinar begins.

or phone in on Saturday January 14 at 2 pm ET/1 pm CT (only audio)

Call-in number: 571-392-7703

Participant PIN: 375 427 129 85

 

Here’s a handout I created.

I hope many of you will join me on Saturday January 14, 2017 to discuss this very important and timely issue.

Carol Topp, CPA

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Top 10 blog posts of 2016

 

Here is a round up of the top 10 most important blog posts from HomeschoolCPA in 2016.

 

Many of them have to do with paying workers in a homeschool organization, probably because I was asked a lot of questions about paying volunteers, giving discounts in stead of paying teachers and the difference between employees and independent contractors.

I also spent a lot of time in 2016 researching and writing Paying Workers in a Homeschool Organization and my blog posts reflect what I was learning.

Compensation to homeschool board members is taxable income

Paying Workers in a Homeschool Organization updated book is ready!

Are homeschool co-op tuition discounts taxable income? Probably!

Can you discount a homeschool co-op class in lieu of paying the teacher?

How you pay your homeschool teachers could affect the property tax exemption for your host church

Can a homeschool group just get together without having to report to the IRS?

Adding religious purpose to bylaws and Articles

Use Quickbooks online for free

Are discounts to homeschool board members taxable compensation?

How the IRS defines a school

I wonder what 2017 will bring in the world of homeschool organizations!

Sign up for my email list to be kept up to date on the questions homeschool leaders are asking.

P.S. Subscribers to my email list get freebies, discounts and special reports I share only with them.

Carol Topp, CPA
HomeschoolCPA.com

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Paying Workers in a Homeschool Organization updated book is ready!

payingworkerscoveroutlined

Some people compare writing a book to giving birth. I can understand that! Please welcome my 12th “child.” This has been quite a labor!

This latest book book, Paying Workers in a Homeschool Organization, is a major update to the 20 page ebook I released in 2009. Homeschooling has changed a lot in the past 7 years and homeschool leaders are asking a lot of questions about paying workers. The book grew from 20 to 130 pages!

Table of Contents

Chapter 1: Can You Pay a Volunteer?
Chapter 2: Paying Board Members and Other Leaders
Chapter 3: Employee or Independent Contractor? Worker Classification
Chapter 4: Guidelines for Hiring Independent Contractors
Chapter 5: Tax Forms for Independent Contractors
Chapter 6: Payroll Taxes for Employers
Chapter 7: Tax Forms for Employers
Chapter 8: Sample Independent Contractor Agreements
Chapter 9: Resources

Paying Workers in a Homeschool Organization,-2nd edition

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

BuyPaperbackButton

 

The ebook version will available soon!

I hope you find the book helpful.

If it still leaves you with questions about your particular situation, I do offer a worker classification consultation. It is private, specific and will give you peace of mind.

Carol Topp, CPA

 

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