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

Using Paypal in a homeschool group

Paypal logo

Over at the I am a Homeschool Group Leader there was a discussion on using PayPal to collect fees.

Here’s some of the tips and advice given:

We set up a PayPal and separate bank account. It has made it so easy for accepting payments. Our registration is $100. If they pay by PayPal, we’ve included a $4 fee to cover the finance charges. Nobody has complained. Others have mailed in checks for just the $100.

 

We set up a co-op email & registered the PayPal account to that email exclusively. We didn’t think to increase the fees to cover the PayPal fees, but will probably do that next year – since they are something like 2% plus $.30 cents per transaction. This has made the PayPal account entirely for the co-op – even the email comes up with the co-op name in the email. All deposits or payments to or from the PayPal account will only be linked to our co-op account. Similar to another member, myself, and the treasurer have access to our bank accounts and PayPal accounts and they are checked very regularly.

 

One other thing… you have to connect this to an email address that does not yet have a PayPal account (last time I talked to PayPal, they were discussing changing this) so you may have to set up an email for your group, if you don’t already have one.

 

Any other payments can also be received there for other things like field trips, parties, etc. I love it. Makes keeping the books so easy. There are a few people who still don’t use PayPal (especially in light of their new privacy policy), so we do still keep some records the old fashioned way.

 

You can setup a nonprofit account with PayPal so your fees aren’t as high. We only use PayPal for enrollment so we opened the account for two months. Closed it with no issues and will reopen next year during enrollment. No need to pay monthly fees for an account we aren’t using accept once a year.

 

We started using PayPal as soon as we started using Homeschool-Life website. It has been so much easier for our treasurer than cash & checks and tracking people down. We use this site to help us figure our PP fees http://thefeecalculator.com/
We ne
ed to look into converting it to a non profit account since we have our official 501 status. I believe the fees are lower then. Our families love the convenience and the generated receipt from PayPal.

 

Does your homeschool group use Paypal? Anything to add? Comment below or on my Facebook page.

Carol Topp, CPA

Group using personal Paypal account

money_exchange_100Hi Carol,

Our (homeschool group’s) yearbook is looking take in the money thru my personal paypal account, then deposit it into an separate bank account so that our Assoc. does cross over the $5000.00 mark. How is this done so that I don’t have to claim the money as extra income.

Currently the association is trying to do a paypal account not just for yearbook for membership dues, they are hesitant because they set up the a paypal account under non-profit, paypal is wanting proof of this and we don’t have it. I suggested that they explain to paypal that they we are a Unincorporated Non-Profit Assoc. and it should be fine.

Sandy in TX

Sandy,

The ideal way to operate is to set up a Paypal account for the association/homeschool group and not run anything through your personal Paypal account.

I understand from other homeschool leaders, that Paypal expects to see proof from the IRS of tax exempt status. They may also accept a nonprofit incorporation certificate from your state. They told one homeschool group they would accept “certified Articles of Incorporation.”

One homeschool registered with Paypal as “Category: Education, Subcategory: Elementary and secondary schools.” While not as accurate as “Charitable/Nonprofit”, it got the job done!

If your organization is not a nonprofit corporation or doesn’t want to be classified by Paypal as as a school, then tell your board that you are using your personal Paypal account and have them record it in the minutes of a board meeting. (“Sandy agreed to allow use of her personal Paypal account for the yearbook project”) Keep a very clear paper trail just in case you are ever audited by the IRS. Keep paper records of every transaction and especially the transfers in and out of the Paypal account. Make print outs from Paypal and file them away with wherever you keep your tax return information. (Do NOT send them to the IRS with your tax return.)

Anyone had problems setting up a Paypal account for their homeschool organization? Id like to hear your experience.

Carol Topp, CPA