Things to Know Before You Sign an Independent Contractor Agreement

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Lots of homeschool organizations hire independent contractors (IC), usually as teachers in a class for homeschool students.

Here’s a great list of things to consider including in your IC agreements. It’s advice to the contractor, but the information is helpful to homeschool leaders hiring ICs, too. Don’t treat them like employees if they are paid like independent contractors.

For the full article, click here

11 Things to Know Before You Sign an Independent Contractor Agreement

(edited for bevity)

1. Intellectual property. If you are creating art, written work, computer programs or other creative works, then it may be an advantage to you to be an independent contractor. Generally, you own the copyright to works created as a contractor. But get it in writing!

2. Taxes. As a contractor, you’ll pay both halves of your Social Security and Medicare taxes. If you’re an employee, the employer pays half. This is a big chunk of pay to give up, so be sure you’re really a contractor before you sign. And be sure to set aside about 15%-25% of your pay to cover the taxes.

3. Control. If you perform services for someone and they control what you do and how you do it, you’re probably an employee. Independent contractors do the work where, when and how they choose. Nobody tells them what order to do the job in, what hours to work, or when they can take off. But, obviously, if you’re hired to teach a class, show up when the class is held. Duh!

4. Equipment and supplies. Independent contractors generally use their own equipment and supplies.

5. Assistants. If you are told who will assist you and can’t choose anyone you want to help you with your tasks, then you may be an employee. Independent contractors can usually hire their own assistants, or choose to work alone.

6. Evaluations. If you are evaluated about the process, details and methods of your work, you may be an employee. An independent contractor is evaluated on results — the end product, not the procedures used.

7. Training. If the company trains you on how they want the job done and the specific procedures to be used, then this is a good indication that you’re an employee. Training for independent contractors should be minimal — instruction on the overall results needed only.

8. Financial control. Pay for employees is normally done by the hour, day or week. Contractors are more frequently paid by the job, although are sometimes paid hourly. A contractor will have more opportunity to make a profit or take a loss than an employee.

9. Opportunity to work elsewhere. Contractors frequently advertise and are considered free to take work from other companies. Employees usually have to work for a single employer only.

10. Benefits. If the company provides insurance, sick days, vacation time, pension or other benefits, then you are likely an employee.

11. Indefinite time. If you are hired for an indefinite period of time, as opposed to working on a specific project or series of projects, then you may be an employee.

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Need more help composing an independent contractor agreement? I’m updating my book, Paying Workers in a Homeschool Organization this summer. It will have sample IC agreements. If you can’t wait until it’s ready, the current ebook as a very usable agreement to get your started.

Carol Topp, CPA

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

Are volunteer teachers in a homeschool co-op allowed to get free or discounted classes? Do they need to claim the amount on their yearly income?

We have independent contractors  who work for our homeschool organization. Are they allowed to get discounted classes instead of getting paid their full amount of payment?

How do we do the paperwork properly?

Mr M.

 

Dear Mr M,

Volunteers are treated differently than your paid independent contractor teachers, so I will respond to each separately.

Volunteers

Volunteers may receive discounts or free classes from your homeschool organization. It is not included in their taxable income, if it is insignificant. It should be understood by everyone that the discount is in appreciation of the volunteer’s efforts and not payment for services. The volunteers should understand that discounts are not guaranteed.

Independent Contractors

Independent Contractors (IC) can receive discounts from their class fees, but the discount needs to be added to their compensation when reported on a 1099MISC. Even if the IC doesn’t receive an 1099MISC from you, the value of the discounted classes should be reported as income on his or her tax return. You may want to explain that in a  letter or include it in your written Independent Contractor agreement.

Can you discount a class in lieu of paying a teacher?

Homeschool organizations should not be offsetting an independent contractor’s payments for her services, which is taxable earned income, by the amount the contractor owes for her child to attend your co-op classes,  which is a personal  expense (i.e. not tax deductible).

I recommend that the teacher should be paid the full amount earned and in a separate transaction, she should pay her tuition to your co-op. 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 IC needs to report to the IRS. It’s mixing taxable income with a non-tax-deductible personal expense.

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

 

Tracking payments to homeschool co-op teachers

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If teachers are paid directly how does the homeschool co-op know about who has paid in order to keep track of payments?

 

It’s very common got homeschool co-ops and tutorial programs to ask parents to pay the teachers directly and not pay through the co-op or homeschool tutorial. This eliminates payroll paperwork and lessens the income and financial transactions flowing through the homeschool organization (and this makes life easier on your treasurer!).

Your homeschool co-op doesn’t need to keep track of which families paid the teachers. It’s the teachers job to get payments from the families.

The teachers are independent contractors and therefore are supposed to bear the burden of the risk of not getting paid. Your co-op should not carry this risk.

The IRS definition of an independent contractor says “Having the possibility of incurring a loss indicates that the worker is an independent contractor.”

Source: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Financial-Control

I hope that helps,

Carol Topp, CPA

Independent Contractors: Type of Relationship

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We’ve looked at two factors the IRS uses to distinguish between employees and independent contractors: Behavioral Control and Financial Control. This blog post will discuss the third factor: Type of Relationship. 

As you read through this factor and the other two, consider how your homeschool group is treating its workers. Make changes to clearly distinguish your employees from your independent contractors.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Type-of-Relationship

Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.

The factors, for the type of relationship between two parties, generally fall into the categories of:

  • Written contracts
  • Employee benefits
  • Permanency of the relationship
  • Services provided as key activity of the business

Written Contracts

Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status.  The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax.  How the parties work together determines whether the worker is an employee or an independent contractor.

Employee Benefits

Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance.  Businesses generally do not grant these benefits to independent contractors.  However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.

Permanency of the Relationship

If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

Services Provided as Key Activity of the Business

If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities.  For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work.  This would indicate an employer-employee relationship.

 

Read the other factors that determine worker status:

Financial Control

Behavioral Control

And always remember:

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.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Still confused? Maybe my book, Paying Workers in a Homeschool Organization can help. It’s written just for homeschool leaders.

Or perhaps you prefer a private phone consultation. I offer a worker classification determination to help homeschool groups know if they are classifying their workers correctly.

Carol Topp, CPA

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Independent Contractors: Financial control

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Since so many homeschool organizations hire workers as Independent Contractors, it might be helpful to examine the difference between employees and independent contractors.

This is the second of a 3-part series on the definition of of independent contractor and  will examine one of the factors the IRS uses to determine worker classification: Financial Control.

The IRS has some helpful information on how to distinguish between an employee and an independent contractor at  https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Financial-Control

 Financial control refers to facts that show whether or not the business (or nonprofit organization) has the right to control the economic aspects of the worker’s job.

The financial control factors fall into the categories of:

  • Significant investment
  • Unreimbursed expenses
  • Opportunity for profit or loss
  • Services available to the market
  • Method of payment

Significant investment

An independent contractor often has a significant investment in the equipment he or she uses in working for someone else.  However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment.  Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

Unreimbursed expenses

Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

Opportunity for profit or loss

The opportunity to make a profit or loss is another important factor.  If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work).  Having the possibility of incurring a loss indicates that the worker is an independent contractor.

Services available to the market

An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

Method of payment

An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

 

Read the other factors that determine IC status:

Behavioral Control

Type of Relationship

And always remember:

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.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Still confused? Maybe my book, Paying Workers in a Homeschool Organization can help. It’s written just for homeschool leaders.

Or perhaps you prefer a private phone consultation. I offer a worker classification determination to help homeschool groups know if they are classifying their workers correctly.

Carol Topp, CPA

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Definition of Independent Contractor: Behavior

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Here at HomeschoolCPA, I get a lot of questions about the difference between employees and independent contractors (IC). Many homeschool organizations hire workers as ICs and wonder if they really should be treated as employees.

This is the first of a 3-part series on the definition of IC. I hope it’s helpful.

Lets start with Behavioral Control.

My source is straight from the IRS website: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Behavioral-Control

Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

The behavioral control factors fall into the categories of:

  • Type of instructions given
  • Degree of instruction
  • Evaluation systems
  • Training

Types of Instructions Given

An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

  • When and where to do the work.
  • What tools or equipment to use.
  • What workers to hire or to assist with the work.
  • Where to purchase supplies and services.
  • What work must be performed by a specified individual.
  • What order or sequence to follow when performing the work.

Degree of Instruction

Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

Evaluation System

If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.

If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

Training

If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way.  This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.

 

 

Read the other factors that determine IC status:

Type of Relationship

Financial Control

And always remember this advice from the IRS (emphasis added)

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.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Still confused? Maybe my book, Paying Workers in a Homeschool Organization can help. It’s  written just for homeschool leaders.

Or perhaps you prefer a private phone consultation. I offer a worker classification determination to help homeschool groups know if they are classifying their workers correctly.

 

Carol Topp, CPA

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

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Carol,

I see a lot of schools (homeschooling co-ops, private schools, etc) that offer tuition discounts or reduction for parent volunteer hours. If a parent volunteers to teach a  class a few hours a week and receives a tuition reduction for this commitment, is this considered taxable income for the parent?

I have also read this:

“IRS has broadly interpreted a worker’s “compensation” to also include the amount of free or reduced tuition that is given to a parent in consideration for his or her service to the school or church. A worker is no longer considered to be “volunteering” if he or she receives something of value “in kind” for his or her service. In the situation of a working parent whose child is enrolled in the school, it is the student’s waived tuition amount normally charged to nonworking parents that will constitute the worker’s taxable wage amount.”

I would love any follow up information you have about this. Thanks again!

Joanna R.

 

Dear Joanna,

I read the quote you provided with a lot of interest. I did a little research and came across IRS Publication 3079 which, although its title is “Tax Exempt Organizations and Gaming,” had a helpful section titled, “Volunteer Labor”

It stated something I didn’t want to read,

“Compensation is interpreted broadly. A worker who obtains goods or services at a reduced price in return for his services may be considered to be compensated.”

 

When the IRS says “compensated,” they mean taxable income. Ugh! That could mean that hard working volunteers in a homeschool organization, who get a discount on tuition, could have to report and pay taxes on this “compensation.”

But, as with all IRS documents, I kept reading Publication 3079 and found this:

On the other hand, a worker who receives merely insignificant monetary or non-monetary benefits is considered a volunteer, not a compensated worker.
Determining whether a benefit is insignificant requires consideration not only of the value of the benefit but also:
•The quantity and quality of the work performed;
•The cost to the organization of providing the benefit; and
•The connection between the benefit received and the performance of services.
(emphasis added)

 

So, if a co-op gives an insignificant monetary benefit to its volunteers, it is not taxable income. The IRS does not define insignificant, but here ares two examples that might help:

Insignificant benefits to a volunteer
A volunteer teacher was given a $50 discount off her $250 tuition for teaching a class. She put in a minimum of 30 hours preparing and teaching this semester-long class. That’s is an hourly rate of less than $2/hour. That seems pretty insignificant to me! It cost nothing for the co-op to offer this benefit. The co-op offered this discount as an incentive to increase volunteerism and it was not payment for services.

Significant benefits are taxable income
Another co-op gave their director several thousands of dollars in gift cards to grocery stores and Target, gave her children free tuition worth $1,500,  waived all field trip fees, theater ticket fees and registration fees amounting to hundreds more in benefits. These were NOT insignificant and were compensation for her services. The co-op thought that by giving gift cards and reduced tuition they could avoid payroll taxes and the paperwork of hiring and paying their director as an employee. They were wrong! The director should be treated as an employee. She should report all these benefits as taxable compensation.

Conclusion
Homeschool leaders should determine if the benefits of reduced tuition of fees they are giving to volunteers are insignificant. Look to the IRS guidelines in IRS Publication 3079 listed above. If the benefits are significant and are compensation for services, then it needs to be reported as taxable income to the worker/volunteer.

I can help you determine if your fee waivers or discounts are “insignificant.” Just contact me.

My book Paying Workers in a Homeschool Organization can help you determine the paperwork and reporting for workers.

Carol Topp, CPA

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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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Should my homeschool co-op be giving any tax forms to our teachers?

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Hi Carol,

I had someone ask if our homeschool co-op will send them a 1099 for payment we made to her this year.  To the best of my knowledge, we have never done this before.  Is this something we should be doing?  Is there a guideline for how and when to do this?
-Trish

If you paid an individual more than $600 for their services in a calendar year, you are supposed to give them a Form 1099-MISC and a copy goes to the IRS.

You do not have to provide 1099-MISCs to corporations or for goods you purchased or for reimbursements of expenses.You only give 1099-MISC to individuals who you paid for hired work.

It’s a good practice to collect the legal name, address and SSN from every person you pay for their services before paying them. Use IRS Form W-9.

I use a service Yearli.com to prepare the Form 1099-MISC. They charge about $5/form, mail a copy to the recipient and to the IRS. It’s very easy to use.

The 1099MISC is due to the recipient and the IRS by January 31 each year.

My new book Paying Workers in a Homeschool Organization can help  you understand all the rules and tax forms for independent contractors.

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 teacher work off their tuition to a homeschool co-op?

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We have recently started an inclusive homeschool co-op. I have three of your ebooks and I’m a bit confused on a few issues.

1. Each family pays the outside teachers directly. We do a registration process, but the cash or checks go to the teacher, not the co-op. Do we mark that money “in the books” or is that outside of co-op money?

2. I am also confused with the differences between volunteer parents teaching a class for reduced fees for classes and  an Independent Contractor working off their tuition.

What am I missing?

Thank you so much for your time,
Heather

Heather,
Thank you for contacting me. To answer your questions:
1. Since the funds never come to your group, they are not recorded in your books as income to your group.

2. Volunteer vs Independent Contractor (IC). It’s a world of difference because an IC is not supposed to receive any fringe benefits such as free or reduced tuition. If you give an IC fringe benefits, then they are an employee and you need to set up payroll, pay unemployment taxes, workers comp, SS/Medicare taxes, etc…The IRS is very clear and very strict about ICs not receiving benefits.
Employees of educational institutions can receive tax-free tuition discounts. Colleges and private schools do that a lot for their employees.

On the other hand, a volunteer can receive reduced or free tuition as a nontaxable benefit if it is insubstantial. If the free tuition is substantial, then the IRS would consider this compensation and the volunteer should report it as taxable income on her tax return. Read more about insubstantial benefits to volunteers.

This explanation may help:
(this is from an article “Money, Taxes and Your Homeschool Family” in the March/April edition of The Old Schoolhouse magazine. Read the full article here: http://ow.ly/uAkhI

Teresa, a homeschool mom who teaches at a co-op where her own children take classes, was told by her co-op that they would just deduct her co-op tuition from her income as a teacher. Teresa’s co-op paid her as an independent contractor and this arrangement didn’t seem correct to her.

Fortunately, she emailed me, asking, “Can I work off my co-op fees by teaching a class?”

The answer is no, you cannot.

The homeschool co-op should pay Teresa with a paycheck. Then, as a separate transaction, Teresa should pay her fees to the co-op. It is important to separate the two transactions because of taxes. Being paid for teaching is earning taxable income. Paying tuition is a personal expense and not tax deductible. The two do not negate each other for tax purposes.

It may seem like more work for the co-op’s treasurer to pay and collect money from the same person, but the separation is important for clarity and correct reporting of taxable income to Teresa.

I hope that helps explain the difference.

My new book Paying Workers in a Homeschool Organization can help homeschool leaders understand how to properly set up compensation for volunteers and Independent Contractors.

Carol Topp, CPA


payingworkerscoveroutlined

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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