Co-op collects money to send leader to a homeschool convention

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Hi Carol,
My homeschool group’s Board of Directors recently took up a collection from our members as a way of presenting me with an end-of-year gift of appreciation.  This was a complete surprise to me, especially when they presented me with a check totaling over $700!

The Board collected donations from individual members and then wrote me a check on the group account.  I’m unsure of how to deal with this tax-wise. The gift was given with the intent of paying my expenses for our state’s homeschool convention, including the leadership conference. If I returned the check and used the group’s debit card to pay my hotel expenses, would this alleviate the taxes?

Thank you for taking the time to answer.  I want to make this as easy as possible for group record keeping, and I’m not sure if this is the correct way to go about it.

Blessings,
Barbie T, Florida

Barbie,

I’m glad my website and books have been helpful.  You sound as if you have a great group and I’m sure they appreciate you!

Gift or taxable compensation?

It is sometimes difficult to tell if cash is a gift or a payment for services. The difficulty in determining if payment to a worker is a gift or compensation is that you need to determine the intent of the donor. The IRS has a very difficult time determining intent or expectations. We, on the other hand, can usually determine if a payment is a gift because we know the donor and their expectations.

It sounds as if the co-op was collecting money to defray the expense of sending you to a homeschool convention. It is taxable income to you with expectation that you will “earn” it by going to the convention (and learning a lot!).

If you use the payment on co-op related expenses (like the convention), then you could claim those expenses on your tax return. At the end of the year you  should report the $700 as income on your tax return and and then report expenses like the convention fee, mileage and hotel costs as deductions. You may break even or show a small profit.

A better way

In retrospect, it would have been better if the board had collected the monies and then gave you a nice note saying that you won an all expenses paid trip to the convention and used the co-op’s debit card to pay the expenses. These expenses would not be considered taxable income to you since the money never came to you. And the convention is to develop your leadership skills, not for your personal pleasure (although you may enjoy it!).

Carol Topp, CPA

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Are discounts to homeschool board members taxable compensation?

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My homeschool group gives a fee waiver of our dues to our board officers. Would that discount be reported to our officers as taxable compensation?

Melissa

 

Melissa,

This is an excellent question because I’ve encouraged homeschool groups to offer discounts on membership fees to their volunteers or board members as a way to show appreciation.

The IRS defines compensation as:

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]  (emphasis added)

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

 So, free or reduced fees that are educational benefits is taxable compensation to your board members.

So here’s my advice:

  • Keep your fee waivers to board members small and insignificant. The IRS does state that insignificant benefits to volunteers is not taxable income.
    • I can help you determine if your fee waivers or discounts are “insignificant.” Just contact me.
  • Consider showing appreciation with noncash gifts such as food, chocolate, or flowers. Buy resources to make their jobs easier including helpful books, hiring a payroll company (your treasurer will love it!), accounting software, etc.
  • Have the amount of fee waivers decided by a separate, independent committee or put it to the vote of the full membership. The board should not vote themselves a fee waiver. It’s a conflict of interest.
  • Add a provision to your bylaws allowing a small fee waiver (or tuition discount) to board members or other volunteers. Consider granting a percentage discount instead of a dollar amount such as 20% off the fee.

 


Have more questions about compensation to board members in your homeschool organization?

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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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Carol Topp, CPA

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Can I avoid the expense of hiring employees by being a 501c3?

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I run a homeschool tutorial in Texas as my small business. My tutors should be classified as employees according to the IRS rules. Due to the expenses and paperwork involved with hiring employees, I would like to set up a 501(C)(3).

I would like to hire you to help me with the process of setting up our local group as a 501(c)(3). Can you help me begin the process of setting up as a 501(c)(3)?

B in Texas

Dear B,
You should understand that having 501(c)(3) tax exempt status does NOT change the employer or payroll taxes you would have to pay.

501(c)(3) tax exempt status only grants nonprofit organizations tax exemption from federal income tax, not the payroll taxes. In other words, nonprofit tax exempt organizations still have to pay payroll taxes such as SS/Medicare, workers comp, unemployment insurance premiums.

Additionally, forming your business as a nonprofit organization means that you are no longer in control of the organization, nor does the money belong to you. The organization must be run by a board. The board can hire you as an employee, but they can also fire you.

Because you are converting a for-profit business to a nonprofit organization, you are not eligible to use the IRS’s short online Form 1023-EZ application form. Instead you will have to use the longer Form 1023 to apply for 501(c)(3) tax exempt status.

So you need to carefully consider your motives in forming a nonprofit, tax exempt organization. It should be done for reasons other than the expense and paperwork of hiring employees, because that burden will still exist as a 501(c)(3) tax exempt nonprofit organization.

Need help understanding the rules regarding paying workers in your homeschool organization? My book Paying Workers in a Homeschool Organization will explain the difference between employees and Independent Contractors and the necessary forms to file.

Carol Topp, CPA

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Homeschool co-op gives “scholarships.” What are the tax liabilities?

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I am curious how a scholarship for a family works in terms of tax liability in an all volunteer co-op with no payment to teachers, board members, etc. Each family pays a membership fee which covers expenses for family events, insurance, state filing fees, etc.

For example, family A donates the amount of a family membership to the organization. The board notices that Family B is out of work and therefore credits the amount paid by Family A to Family B’s registration fees. Family B still pays things like class fees, but the annual registration was not paid by Family B.

What duty does the co-op have in terms of tax liability for itself and are there any potential pitfalls to be aware of?
Marisa

Marisa,

Your organization does not have to give the recipient of a benevolent gift any documentation. Some homeschool organization call this gift a tuition discount or a “scholarship.”  Read here why I don’t like the word scholarship when you are really giving a needy family a tuition discount.

The donor can be given a receipt for their donation. Taxpayers must have a receipt if the donation is more than $250, so frequently charitable organizations give every donor a receipt (an email is OK). Be sure to include the statement that “No goods or services were received in exchange for this contribution.”

The IRS requires 501c3 organizations filing a Form 990 with a total of more than $5,000/year in grants or assistance to individuals to keep a record of the amounts and purpose of the grants. These records are submitted to the IRS on Form 990 Schedule I. These records are not reported to the IRS if your organization files a 990-EZ or 990-N. In other words, only large charities (more than $200,000 in annual revenues) report information on the grants to individuals. The names of the individuals are not given to the IRS, just the amount and purpose of the assistance.

IRS Publication 4221PC has guidelines to follow regarding charitable gifts and record keeping.
It’s kind of a dry publication, but very important. The IRS used to mail Pub 4221 with your letter approving 501c3 status, but stopped doing that several years ago to save printing costs. It’s such an important publication that I recommend treasurers read it regularly, maybe once a year. Find it online here: https://www.irs.gov/pub/irs-pdf/p4221pc.pdf

Hope that helps,

Carol Topp, CPA

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

 

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

Carol Topp, CPA

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Will a nonprofit owe taxes on income from selling ads?

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We considering including advertising in our conference brochure. Can we consider this conference (exhibitor) income? Or is it UBI (Unrelated Business Income)?
We are also considering placing advertising in our magazine (and our website). Is this UBI? And how do we track it? And how do we report it? And what percent taxes would we pay on it?
Dorothy in OR
Dear Dorothy,
Advertising revenue is definitely Unrelated Business Income (UBIT) in the eyes of the IRS, because selling ads is not related to your tax exempt purpose (education), but you can avoid paying taxes on the unrelated business income in several ways.

The IRS offers several exceptions to UBI Tax (UBIT):

  1.     A $1,000 threshold allows that the first $1,000 in income from an unrelated business will not be taxed.
  2.     If the fundraiser (or unrelated business) is run substantially by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.
  3.     If the fundraiser is not regularly carried on, such as a once-a-year spaghetti supper, then the proceeds are not subject to UBIT.
  4.     If you are selling donated items, like in a garage sale, the income raised is not taxed.

I think #1 or #2 will apply to your group, so can get income from advertising without worrying about paying tax on it.

It’s a good idea to create a line item in your record keeping labeled “Advertising Income” so it’s clearly differentiated from other income.

Carol Topp, CPA

Can homeschool teachers be allowed to keep extra money as a donation?

Dollarsinhand

Dear Carol,

I have purchased and am reading your ebook Paying Workers in a Homeschool Organization. Thank you for making this available!

We are a co-operative, so all are teachers are basically volunteers. I do, however, collect on their behalf an estimated class contribution to help them cover costs related to teaching: curriculum, printing handouts and lesson plans, consumables used in class etc. This amount is determined by the teacher, usually $5-10 up to $50 per semester depending on the class. These funds are collected and then dispersed to the instructor at the beginning of the semester. We don’t require receipts or an accounting to be submitted. Any remaining funds are considered a “donation” to the teacher to recognize their time and effort in preparing and teaching the class. Teachers are not required refund monies back to the families.

Most of us feel that this structure is reasonable. However, one member is questioning. Does our policy seem acceptable from a legal position?

Thank you, in advance, for taking the time to answer my questions.

God bless your service,
Rose

Rose,

Thank you for your kind words. I’m glad the book was helpful. It’s been updated since you read it and has grown from a 20 page ebook, to a 130-page paperback.

This statement bothers me greatly, “We don’t require receipts or an accounting to be submitted. Any remaining funds are considered a “donation” to the teacher to recognize their time and effort in preparing and teaching the class.”

When you do not request receipts, you are running what the IRS calls an “non-accountable” plan for reimbursements.

The remaining funds that you let your teachers keep is not a donation, it is a payment for services and is taxable income that needs to be reported to the IRS. Actually, the full amount you give to the teachers is taxable income under a non-accountable plan.

I have written a few blog posts on the topic of paying volunteers, requesting receipts for reimbursements, etc. Please read these:

No receipts for expenses can get you in trouble
and
Should my homeschool co-op be giving any tax forms to our teachers?

In my book Money Management in a Homeschool Organization I discuss how to properly set up an accountable reimbursement plan (Chapter 7).

I hope you will change your practices (i.e set up an accountable plan for reimbursements and start requiring receipts) so that your teachers do not have to report their payments as taxable income.

You may also find my updated version of Paying Workers in a Homeschool Organization helpful.

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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Congratulations to homeschool groups on tax exempt status!

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Congratulations to several homeschool organizations recently granted 501(c)(3) tax exempt status by the IRS!

  • LifeShine from San Antonio, TX
  • Grace Home Educators of Martinsville, IN
  • United Christian Homeschool Association in Belton, KY
  • SCOPE Homeschool Group in Ashville, AL

Both Lifeshine and Grace had their tax exempt status automatically revoked for failure to file the IRS Form 990 for 3 consecutive years. Fortunately, I was able to help them get their tax exempt status reinstated and neither group owed any back taxes. Yeah!

Do you know about the IRS required annual reporting for ALL nonprofit organizations (that means your homeschool group, even if you never had to file any reports with the IRS before)?

Do you have questions about the tax exempt status of your organization?

Contact me and I will help your homeschool organization get tax exempt status (or get it back if it was revoked).

It’s better than paying taxes!

Carol Topp, CPA

 

Will fundraisers cause a homeschool support group to pay taxes?

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I looked at the description of the 501c(7) Social Club status, and also reviewed your comparison chart between c3 and c7 status. I agree that our homeschool group most closely fit the 501(c)(7) Social Club status.

However, I was wondering if our periodic fundraisers would cause us to be taxed – your chart says on income from other sources.  We hold the fundraisers when our funds from membership are too low to pay the rent and other costs.
Thank you,
Lisa R

 

Lisa,

I’m glad you’ve figured out the differences between 501c3 charity and 501c7 Social club status. It’s important to figure out where your group fits.

You asked if periodic fundraisers would cause you to be taxed. It could be a problem, but not likely.

In general, fundraisers are considered “unrelated income” and nonprofits must pay tax on unrelated income (called Unrelated Business Income Tax, or UBIT).

Fortunately, the IRS offers several ways to avoid the UBIT tax. The exceptions include:

1. If the fundraiser was substantially conducted by volunteers (if no one was paid to run the fundraiser, then the proceeds are not taxed)

2. The fundraiser proceeds under $1,000 is not taxed.

The IRS has more exceptions to UBIT, but one or both of these exceptions to paying unrelated business income tax probably apply to your group.

Additionally, the IRS requires 501c7 Social Clubs to have most of their income come from membership fees (65% or more). You probably saw that on the chart comparing 501c3 to a 501c7 Social Club.

So make sure that your fundraisers stay under 35% of your total income. You said they are periodic and sound as if they are secondary to your membership fees (“We hold the fundraisers when our funds from membership are too low to pay the rent and other costs”).

I hope that helps.

Carol Topp, CPA