Can homeschool groups give free tuition to teachers like private schools?

I taught at a private school before I started homeschooling and I received free tuition for my children. Now I teach at a homeschool program. Can homeschool groups give free or reduced tuition as a fringe benefit like private schools?

 

Maybe!

You’re talking about what the US Tax Code calls “Qualified tuition reduction.”

The United States Tax Code, or 26 U.S.C. § 117(d) has some good news:
 In General. – Gross income shall not include any qualified tuition reduction.
“qualified tuition reduction” means the amount of any reduction in tuition provided to an employee of an organization described in section 170(b)(1)(A)(ii)

 

In plain English that means a school may provide its employees with tuition breaks, or cash grants for payment of tuition, without that benefit being considered taxable income to the employee. Good news for school employees!

But notice a few important words: employee and school

Are you an employee of the homeschool program?

If so, keep reading. But if you are an Independent Contractor, you cannot get tax-free tuition reduction benefits.

Is the homeschool program you work for as an employee a “school”?

The US Tax Code defines a school in section 170(b)(1)(A)(ii):

 An educational organization is described in section 170(b)(1)(A)(ii) if its primary function is the presentation of formal instruction and it normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. The term includes institutions such as primary, secondary, preparatory, or high schools, and colleges and universities. It includes Federal, State, and other public-supported schools which otherwise come within the definition.

 

One aspect of a school is a “regular faculty,” which the IRS defines as

“qualified teachers instruct the students, and the same teachers do so on a recurrent basis.” 

Source: Internal Revenue Manual viewed http://www.irs.gov/irm/part7/irm_07-026-002.html#d0e549 on 5/11/15.

And by “qualified” the IRS means:

“certifications by the appropriate state authority or successful completion of required training.” 

Source: Instructions for Form 1023

Hmmm…

…regular faculty…regularly enrolled student body…qualified teachers…recurrent basis…teacher certifications…

Do those words used to definition a “school” apply to your homeschool program?

Maybe. Or maybe not. It might be hard to tell what the IRS meant since this part of the US Tax Code was written long before anyone thought of homeschool programs employing teachers.

Here’s my concern: If a homeschool program fits the IRS and US Tax Code definition of “school” so that its employees can get tax-free fringe benefits, is that homeschool program also a school in the eyes of its state laws regarding private schools? And are the students then attending a school and not really legally homeschooling?

Additionally, since states regulate education in the USA, your state’s definition of school may be VERY different from the US Tax Code’s definition.

It gets confusing. Very confusing. I’m a pretty conservative CPA and don’t like advising my clients unless things are pretty clearly stated in the tax code.

I also don’t want homeschool programs to be treated as schools or to even call themselves schools. I’m concerned that if homeschool programs call themselves “schools” the state may start imposing all the rules that schools must follow onto independent homeschool programs. That will stifle creativity, educational freedom, add a paperwork and reporting burden, and may end up restricting our homeschool freedoms.

It’s just not worth it!

My advice: Avoid attempting to fit the US Tax Code definition of “school.” Avoid even calling your homeschool program a school with both the IRS and with your state. Maintain homeschooling freedom even if it means you cannot offer your employees tax-free fringe benefits of “qualified tuition reduction.”

You may decide differently from what I wrote above. You may decide your homeschool program is a “school” by the IRS and US Tax Code definition. But if you do, please, please get a legal opinion on your organization’s status as a school from a qualified attorney experienced in educational institutions and get it in writing. Yes, you’ll have to pay for it, but it will be your defense if your State Board of Education wants to regulate your homeschool program!

 

Carol Topp, CPA