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

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

ABC Test for Independent Contractors

 

Is your homeschool teacher an employee or Independent Contractor?

In 2018 California Supreme Court tried to make that questions easier to answer with a simpler 3 part test: The ABC Test for Independent Contractor status.

Can You Pass The Three-Part ABC Test?

Listen to the podcast (11 Minutes) for Carol’s reply.

 

In the podcast Carol mentioned …

In the podcast I mentioned my paying teachers or tutors of others in a homeschool business or nonprofit organization. My book, Paying Workers in a Homeschool Organization has more information about paying Independent Contractors and employees.

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.

 

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The federal government might be shut down, but you still have to file 1099-MISC by January 31

The US government is partially shut down, but taxpayers still must file their 1099-MISC forms by January 31, 2019.

Your homeschool business, tutoring program, nonprofit organization, co-op or community must give a 1099-MISC to anyone you paid more than $600 in 2018.

 

Greatland cpa academy webinar yearli logo

I recommend you use an online filing system like Yearli.com Core program by Greatland (my affiliate link). I’ve used them for years.

Yearli by Greatland is the best way for businesses to file 1099 and W-2 forms.

I used to buy forms at an office supply store, upload the software, type in the data, run the forms through my printer, and mail them all off! Even just a few 1099-MISC could take a long time! And heaven forbid you misfeed the red ink IRS forms into your printer (I did!). You could not make a mistake or back to the office supply store to but another set! Ugh!

Yearli by Greatland makes it so easy and they charge only $4.99 per 1099-MISC. They send a copy to the IRS and mail a copy to the recipient. Simple!

You’ll receive 15% off your filings because I referred you.
You will need the following information:

  • Your business or organization’s legal name, address and EIN number
  • The recipient’s name, address, SSN number and total amount paid in 2018.

Don’t forget you have to have the 1099-MISCs completed by January 31, 2019!

 

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

Can CC Director offered reduced tuition to her tutors?

 

Can a Classical Conversations director gift an Independent Contractor or employee with free or reduced tuition?

Suzy

 

Suzy,
A Classical Conversations (CC) Director can give educational benefits (i.e., discounts on tuition) to Independent Contractors (IC) or employees, but (and this is a big, “but”) the value of these educational benefits is taxable income and must be reported on their W-2 or 1099-MISC.

So a CC director can offer a tuition discount to an IC or employee, but must add the value of that discount to the tax reports she gives to her tutors (1099-MISC or W-2).

And the worker must report her paid wages and the value of this discount/gift on her tax return as taxable income. You should warn her about that in writing and face-to-face, so they aren’t surprised at tax time!

We think that taxable income is only what comes in a paycheck, but the IRS defines taxable compensation to include “educational benefits.”

compensation includes salary or wages, deferred compensation, retirement benefits…, fringe benefits (personal vehicle, meals, lodging, personal and family educational benefits, low interest loans, payment of personal travel, entertainment, or other expenses, athletic or country club membership, and personal use of your property), and bonuses.[i]  (my emphasis added)

[i] Instructions for Form 1023 https://www.irs.gov/instructions/i1023/ch02.html#d0e1909

So, yes, a CC Director can offer free or reduced fees to an Independent Contractor or employee, but it is not a gift; it is taxable income and must be included in their wage and income reporting.

A CC Director should also check her license agreement with Classical Conversations to see if reduced fees are allowed.

If you have additional tax questions about being a CC Director, I wrote an ebook that can help!
Taxes for Licensed CC Directors is available from Classical Conversation. Find it here
Carol Topp, CPA
HomeschoolCPA.com

Summer reading for homeschool leaders: Paying Workers in a Homeschool Organization

Summer is a great time for homeschool leaders to catch up on some reading. I’m highlighting a book each week of summer and this week I’m spotlighting,

 

This book began in 2009 as a 20 page ebook. Homeschooling has changed a lot in the past 9 years and homeschool leaders are asking a lot of questions about paying workers. The book grew from 20 to 130 pages!
I expanded it in 2016 and then it needed an update in late 2017!
 

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.

 Table of Contents
Chapter 1: Can You Pay a Volunteer?Chapter 2: Paying Board Members and Other LeadersChapter 3: Employee or Independent Contractor? Worker ClassificationChapter 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 Agreements

Chapter 9: Resources

Who should read this book?
  • Anyone running a homeschool organization that pays workers of any kind.
  • Anyone who wonders is a volunteer be paid?
  • Anyone who has ever asked,”Should a worker be treated as an employee or independent contractor?”
  • Anyone who gives payments or significant discounts to board members or volunteers.
 Carol Topp, CPA

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Aren’t Classical Conversations tutors just like online tutors?

I’m a Classical Conversations Director and I have a local CPA. I have a question about independent contractor status for tutors. The articles I read here seem to suggest we should treat tutors as employees. Yet, for several years I worked as a tutor for national online tutoring company as an independent contractor. I was given training, direct oversight, evaluations, worked for 5-10 hours a week, yet I was an independent contractor.

What is the difference with CC tutors in the eyes of the IRS? Just trying to understand!

Thanks, Allison

 

Allison,
Thank you for contacting me.

You seem to assume that your worker classification as an Independent Contractor as  a tutor for a national online tutoring company was the correct classification. I’m not convinced it was.

You only told me four bits of information about your relationship with the online tutoring company (I was given training, direct oversight, evaluations, worked for 5-10 hours a week), yet three of those practices (training, evaluations, and oversight) would confirm your status should have been as an employee, not an Independent Contractor.

When I make a worker determination, I do not base my conclusions on what other companies have done or are doing. I base my conclusions on the IRS guidelines, tax court cases, IRS rulings, and the facts and circumstances of each case.

You asked, “What is the difference with CC tutors in the eyes of the IRS?” There may not be many differences in the online tutoring and tutoring for CC,  but I don’t assume that you were correctly treated as an IC when you did the online tutoring.

Classical Conversations offers an ebook I wrote, Taxes for Licensed Classical Conversations Directors, where I explain the options to CC Directors in how to pay tutors.  You can treat your tutors as Independent Contractors and in the ebook I explain the risks and consequences involved.

You might show portions of the ebook to your local CPA and get his/her opinion. If he or she determines your tutors are Independent Contractors, then you should request that your CPA put his/her conclusion in writing and on firm letterhead. A letter like that could possibly help you avoid IRS penalties if you are ever investigated by the IRS. But let’s hope you never need it!

If you have more questions, I would be happy to arrange a phone consultation with you. We can discuss a lot of topics in an hour, but in particular your questions about paying your tutors.

Carol Topp, CPA