Taxes for Classical Conversations Directors

Last tax year I was asked a lot of questions about taxes by Classical Conversations directors and tutors. Things like:

  • What tax form should I to use to report my income and expenses?
  • What expenses were tax deductible?
  • What tax forms do I need to give to my tutors?
  • How should tutors be paid?
  • How do I pay myself as a CC Director?

Fortunately, there is an ebook in the works to help CC Directors titled:

Taxes for Classical Conversions Directors

The ebook is available only to Licensed CC Directors from Classical Conversations, Inc and will be made available by CC when ready (hopefully February or March 2018).

 

Until the ebook is available I recommend the following:

Read the following blog posts:

CC Directors: Do not give yourself a 1099-MISC

Tax return for a Classical Conversations homeschool business

I’m a Classical Conversations Director. Do I have to file any forms with the IRS?

Understanding Taxes for a small homeschool business

Consult a local small business CPA. To find a local tax preparer I recommend two sources:

Both of these websites allow you to search for a local tax preparer who is knowledgeable about taxes for small sole proprietor businesses.

 

Carol Topp, CPA


Free Resource

In the ebook, I mention a bookkeeping spreadsheet for CC Directors. You can get the spreadsheet now (all it costs is your email!)

 


Save

Do I give a 1099-MISC to a place we rented?

Is a 501(c)(7) social club required to issue a 1099 to every vendor for an expenditure over $600? For instance, if we pay a band $1,000 for one of our dinner-dances or an event hall $800 for rental of their facility, does that mean we have to issue a 1099 to them?

Donald

 

Dear Donald,

The instructions for the 1099-MISC say:

File this form (1099-MISC) for each person to whom you have paid during the year at least $600 in:

rents;
services performed by someone who is not your employee;
prizes and awards;
other income payments;
medical and health care payments;
crop insurance proceeds;
cash payments for fish you purchase from anyone engaged in the trade or business of catching fish;
generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
payments to an attorney; or
any fishing boat proceeds

I highlighted the issues that apply to you (rents and payments for services).

You do not have to give a 1099-MISC to corporations, so ask the band and the event hall if they are corporations. My guess is that the band is not a corporation, but the event hall is a corporation and therefore you don’t give them a 1099-MISC.

You should also have collected a IRS Form W-9 Request for Taxpayer Identification Number from the band and any person you pay for their services. On the Form W-9 they indicate if their business is a corporation or not.

I hope that helps,

Carol Topp, CPA

Paypal sent homeschool leader a 1099-K. Is it taxable income to her?

 

Our homeschool co-op leader set up a Paypal account to collect payments from our parents. She was very surprised when Paypal sent her a 1099-K for $40,000 with her name on it! Does she have to report this on her tax return even though it was for the co-op?

 

Oh dear. It appears that leader used her personal name and Social Security Number when setting up the Paypal account. She also used her name and SSN when setting up a checking account. This is not good!

This group was in the process of forming  as a nonprofit corporation in her state, getting an EIN for the corporation, and then applying for tax exempt status with the IRS. But the parents starting paying before all the paperwork was completed so the leader simply set up a personal Paypal account. It’s easy to set up a Paypal account (I have 3 Paypal accounts myself). But now she has a tax mess on her hands!

She should have filed as a nonprofit corporation, gotten an EIN and then set up the PayPal account in the name of the new nonprofit corporation with their new EIN. Then the 1099-K would have come to the homeschool group, not her personally.

But that’s water under the bridge.

In the eyes of Paypal and the IRS, the leader has started a business, collected money, and now needs to report that on her income tax return. Ugh!

She should file a Schedule C Business Income on her personal Form 1040 and report the Paypal income as Gross Receipts. At this point the leader should contact me or a local CPA for assistance in preparing her tax return. This is not the year for DIY! She does not want an IRS audit!

Additionally, she needs to set up this homeschool organization properly with nonprofit corporation, getting an EIN, and then applying for tax exempt status with the IRS, ASAP! I can help with that.

Download my list of steps to take to set up a nonprofit homeschool organization.

 

Please homeschool leaders, do not set up Paypal accounts, bank accounts or EINs in your personal name. Establish an organization and conduct business in the organization’s name only. Otherwise, you may face a complicated tax issue like this poor leaders.

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

What is the IRS planning to do in 2018 for tax exempt organizations?

The IRS Exempt Organization (EO) released their 2018 work plan. It reviews what they did in 2017 and what they will focus on in 2018.

(Note: this is not the individual or business part of the the IRS. This is only the tax exempt part of the IRS.)
Here’s an excerpt that affects homeschool tax exempt organizations:

IRS EO expects to receive an increased number of determination applications in FY 2018. In early 2018, the EO will implement revisions to the Form 1023-EZ, including a required activity description and additional questions on gross receipts, asset thresholds, and foundation classification. As a result of these changes, EO expects the average processing time for a Form 1023-EZ to increase. EO will continue pre-determination reviews of a statistical sample of Form 1023-EZ applications and will continue to analyze the data from these applications to mitigate risks and identify opportunities to improve this form and its instructions.

Okay, now in plain English, the IRS EO (Exempt Organization) will:

  • Ask for a short description of your activities when applying for 501(c)(3) status using the short Form 1023-EZ.
  • They will ask more questions about:
    • Your gross receipts (your sources of income)
    • Your assets (what you own) and
    • what kind of foundation you are. Most homeschool groups are public charities and not private foundations, so most likely this won’t affect you.

The IRS expects it will take longer to get 501(c)(3) approval using Form 1023-EZ. Right now it takes about 2-3 weeks.

They will still randomly sample some 1023-EZ applications and decide if they need to make changes to the form in the future.

 

If your homeschool group has questions about tax exempt status or would like to apply for tax exempt status, please contact me.

Carol Topp, CPA

Save

Save

Homeschool support group has problems with bank and IRS

Carol – I just got off with the IRS and I am EXTREMELY irritated and frustrated!!!!! Our homeschool group is a 501c7 social club; we have adopted by-laws. To open up a bank account, the bank wants documentation from the IRS giving proof that we are recognized as a nonprofit organization.

I spoke with two different people at the IRS and the last one was in the tax exempt dept. He and I did not communicate well. He said we had no paperwork in and that I needed documentation for our group. I explained that I had by-laws but he wanted to know if they were signed. I asked if that meant with a signature and he just kept saying the same thing without answering my question.  We kept going round and round with him asking me the same question. Just frustrating!!!

So what do we need to do to be able to get our checking account opened?

Joy

 

Joy,
I’m sorry you had such difficulty with that IRS employee.

The IRS Exempt Organization has lost many of its experienced employees to retirement and to other parts of the IRS managing the Affordable Care Act (Obamacare). And what we’re left with is robots like you talked to. They simply read from a script. I’ve heard several complaints.

Forget the IRS. Go back to the bank. Explain to them that you do not have IRS proof because you are a self-declared tax exempt 501c7 Social club. Bring your bylaws, a list of board members, and your EIN letter form the IRS. Common law states that a nonprofit is formed when you have a board and bylaws.

Proof from the IRS is not needed to establish a nonprofit checking account because the IRS grants tax-exempt status, not nonprofit status. There IS a difference.

Read this article: How to become a recognized Nonprofit

You may need to educate the bank teller. They are frequently misinformed.

Hand them this blog post: http://homeschoolcpa.com/banker-wants-irs-letter-t…

Tell him that 501c7 social clubs can self-declare tax exempt status and do not need a letter from the IRS to prove tax exempt (or nonprofit) status.

Read more about self declaring tax exempt status: Homeschool Groups as Social Clubs

Act informed and confident. You are eligible to open a nonprofit checking account and do not need “proof” from the IRS of self-declared tax exempt status.

Good luck!!

Carol Topp, CPA
Helping homeschool leaders

 

Save

Save

How Do I Get a Tax Exempt Number?

How does a nonprofit get tax exempt number from the IRS? They don’t!

In this short podcast Carol Topp CPA explains tax ID numbers and the various state agencies that may assign tax numbers.

Listen to the podcast (9 1/2 minutes)

FEATURED PRODUCT from HomeschoolCPA:

State Filings for Non-Profits

You’re not finished with paperwork when you receive tax exemption from the IRS. Your state may have several required forms for you to file as well. Carol Topp, CPA can help your homeschool nonprofit understand what forms to file with your state.

Click Here to request more information!

Save

Don’t tell the IRS your homeschool group is a private foundation (if it’s not).

upset_womansquare

Oh this is a sad, sad story.

I’ve seen this twice recently: a homeschool group prepares their own 501(c)(3) application (Form 1023 or 1023-EZ) with the IRS and incorrectly tells the IRS they are a private foundation.

Homeschool co-ops or other nonprofit educational programs are not private foundations. Private foundations are charitable organizations that are funded by an individual, family, or corporation, like the Bill and Melinda Gates Foundation.

Homeschool organizations are public charities, serving the public good (the education of children). Both of these homeschool organizations didn’t think of themselves as charities. They misunderstood that the IRS uses the word charity to include educational organizations. They also didn’t think of themselves as “public,” because they didn’t not understand the IRS use of that word.

The IRS means serving a public good and being supported financially by the “public” (meaning lots of people) but that does not mean you have to open your doors to the general public! You may still have an application process and limit your membership or participation to your programs.

I spend a lot of time with my nonprofit clients explaining the IRS terms and proper classification, but neither of these organizations hired me to prepare their Form 1023/1023-EZ. Neither of them even asked for a phone consultation or for me to look over the application before sending it to the IRS.

Now they have a real mess on their hands.

They have to file an IRS form to change their status. This requires providing financial statements, explanations, and supporting documents and IRS fees.  Meanwhile, they have to be filing a Form 990-PF, which is quite complex. You need an experienced CPA to prepare a 990-PF.

This is going to be expensive and time consuming. It will probably cost hundreds of dollars in IRS and CPA fees to get it straightened out.

Sad, sad, sad…

Carol Topp, CPA

Helping homeschool leaders with tax and legal compliance

 

Save

Save

Save

Save

Save

Save

Save

Save

Self-declared tax exempt status for 501c3 homeschool groups

We are just starting up our group and we do not want to do anything illegal, but we would not qualify as a nonprofit right now, so as per your IRS book, we would be labeled an Unincorporated Association. My question is… Do we need to do anything legally to continue as a group. We do plan to open a checking account and have an EIN number.
I just felt that for a group that is just starting and is not a nonprofit or at the 501 (c) (3) status yet, we don’t know the first steps to get a group of and running and if we need to do anything legally to start. Thank you so much for your time!
-EC

 

Dear EC,

Please watch this video 3 times (yes, 3 times!):

 

You will hear that to legally and correctly set up a nonprofit you need 3 things:

  1. A mission that is not motivated by profit
  2. A board
  3. Organizing documents. Usually bylaws but Articles of Association are also recommended. Get samples here

If you have those three things, your organization is a nonprofit. Congratulations! It may not be a nonprofit corporation; instead it is an unincorporated association, as you mentioned, but it is still a nonprofit.

But, there is a difference between nonprofit status and tax exempt status

Nonprofit status is granted by your state while tax exempt status is granted by the IRS to qualifying nonprofit organizations. Typically nonprofits need to formally apply for tax exempt status with the IRS.

But small nonprofits can self declare  501(c)(3) tax exempt status if your annual gross revenues* are $5,000 or less.

*Annual gross revenues are all the money you take in in a year, even if it just goes right back out. It’s not what is left over at the end of the year. It is not the amount in your checkbook. It is annual (yearly) gross (all) revenues (intake).

This video may be helpful: https://www.youtube.com/watch?v=DCFjnnY7mEw

 

How to self declare 501c3 tax exempt status

Since you have not officially applied on paper for 501(c)(3) status  (you self-declared 501(c)(3) status and don’t have to file the paperwork), your nonprofit organization is not in the IRS database (yet), so you need to call the IRS Customer Account Services at 1-877-829-5500 and be added to their database so you can begin filing the Form 990-Ns.

It typically takes 6 weeks after you call to be added to the IRS database.

Say something like this,

“We’re a brand new 501(c)(3) educational organization and I needed to get added to the IRS exempt organization database so we can start filing our 990-Ns.”


**Note that only 501(c)(3) organizations with less than $5,000 annual gross revenues can “self-declare” their tax exempt status. Organizations with more than $5,000/year in revenues must apply for 501(c)(3) status using Form 1023 or the new, shorter Form 1023-EZ.


The IRS employee will ask for your EIN and organization’s name, address, and probably a contact name.

They may also ask what date your fiscal year ends. Many homeschool groups operate on a calendar year, but some operate on a school year with a year end of June 30 or July 31. Look at the form you filed when you applied for your EIN to see what you chose as your fiscal year end.

They may ask if you have “organizing documents.” They mean bylaws or Articles of Association. So create bylaws or Articles of Association/Articles of Incorporation before you call the IRS. Get the board to approve and sign them. Sample bylaws and Articles of Association can be found here.

Call the IRS early in the morning. They open at 8 am ET and you can usually get through pretty quickly of you call then. Record the date you call, the IRS employee name and their identification number.

 

How to keep your 501(c)(3) tax exempt status

Be sure you go online (IRS.gov/990n) to file the Form 990-N anytime after your fiscal year ends and before its due date which is 4 1/2 months after the end of your fiscal year. If you operate on a calendar year, the 990-N is due May 15.

 

Carol Topp, CPA

Helping homeschool leaders with legal and tax compliance

 

How to Self Declare Tax Exempt Status

Your homeschool group can have tax exempt status without applying with the IRS.

Want to know how?

In this short podcast, Carol Topp, CPA, the HomeschoolCPA, tells you how to self declare tax exempt status, keep all of your surplus for your group and not pay the IRS.

Listen to the podcast (15 minutes)

 

FEATURED PRODUCT from HomeschoolCPA:

The IRS and Your Homeschool Organization

Does your homeschool group need to pay taxes?  Could they avoid paying taxes by being a 501c3 tax exempt organization? Do you know the pros and cons of 501c3 status? Do you know what 501c3 status could mean for your homeschool group?  I have the answers for you in my book The IRS and Your Homeschool Organization. The information I share in my book has been helpful to homeschool support groups, co-ops, music and sports groups and will help you understand:

  • The benefits of 501c3 status
  • The disadvantages too!
  • What it takes to make the IRS happy
  • What your state requires
  • Why your organization should consider becoming a nonprofit corporation
  • What is the difference between nonprofit incorporation and tax exemption
  • IRS requirements after you are tax exempt

Click Here to request more information!

Save