I’m a leader of a small, for-profit classical homeschool program. I have only been recording the amount that I retain after I pay my tutors on my tax return. After reading your website and FB comments, I’m confused. Why do I have to claim all of the money even though I don’t keep it?
-S
Dear S,
You, as a business owner, must report all your income om your tax return. Additionally, you can deduct business related expenses, like paying your tutors, insurance, rent, etc.
You asked, “Why do I have to claim all of the money even though I don’t keep it?”
Good question!
Short answer: It’s the law. The IRS requires business owners to report ALL their income. Then the business owner shows the IRS all their business-related expenses. The difference is profit and that’s what business owners pay taxes on (and get to keep).
Longer answer: By showing your total income from your business and all your business-related expenses, you prove to the IRS that your business had little or no profit. The IRS won’t take your word for it that your didn’t “keep it.” They want proof of how much profit you had and you give the proof by filling out the numbers on the tax form (Form 1040 Schedule C for businesses).
On your tax form (Schedule C) you should have answered this question: Did you make payments that require you to file Form 1099? with a YES, because you paid your tutors as 1099 Independent Contractors and gave them each a 1099-MISC (I assume).
Then further down on the Schedule C you can deduct what you paid those tutors on Line 11 Contract Labor (or Line 26 Wages if they are employees). Then you can also show any other expenses like insurance, office supplies, etc.
It is not my intention to scare you or anyone else away from operating a homeschool business. You provide an essential service to homeschool families, so don’t stop, but you do need to understand the legal and tax implications, so I am offering this webinar to help:
On Monday January 21, 2019 at 8 pm I will be giving a live webinar on Tax Preparation for Homeschool Business Owners. The webinar is free for the live version. For details visit HomeschoolCPA.com/HSBIZTAXES
If you did not prepare your tax return this correct way, you may need to amend your prior years’ tax returns, especially if you failed to report all of your income. You can amend up to 3 prior years. The IRS can fine taxpayers for under-reporting income. They take that very seriously!
But if you correct prior year tax returns now, the IRS usually waives any fines and penalties.
You may not owe any additional tax, so don’t panic!. I cannot tell if you will owe more tax (or get money back!) until I would see your tax return and recalculate your Schedule C.
Did you prepare the tax return yourself or use a professional tax preparer? If you used a professional tax preparer, go back to him/her with all your records for the past 3 years and see what they recommend that you do.
I hope that helps!
Carol Topp, CPA
HomeschoolCPA.com
I am both director and tutor this school year. I didn’t give my self a 1099 for tutoring, I was confused as to what to do. Any advice in this situation?
Thanks for all your work in helping CC families.
Your tax return should show a larger profit than other Directors because you didn’t pay a tutor. Instead you did the tutoring yourself. That means you have lower expenses and more profit. Like any business owner if you do things yourself instead of hiring someone to do it, it reduces your expenses and allows you to keep more of the money. 🙂
HTH,
Carol Topp, CPA