Search Results for: educational benefits taxable

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.
  • 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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Non-profit or for-profit for a homeschool co-op?

I am planning to start a homeschool nature-based co-op, where the parents will stay on-site, and we will meet 1-2 days per week. I believe we would be a for-profit organization. Is there some reason to choose non-profit status versus for-profit, in the case of a homeschool co-op? Any insight on how to get started would be very helpful. I have been a small-business owner for many years, but have never been in the non-profit administration world.
Shay

Shay,

Let’s start by addressing the word “co-op.” A homeschool co-op is a group of parents voluntarily cooperating to teach each others’ children. The word voluntarily is important. Co-ops depend on volunteer labor. So most co-ops are formed as nonprofits. A business cannot have volunteers working for it. That’s a violation of the Fair Labor Standards Act. So if you run the group as your business, you cannot have volunteers. Everyone must get paid if they work for the business.

But maybe you meant “co-op” in a broader sense to mean a group of homeschoolers. Your business can sell a service to a group of homeschool families. But that’s not a co-op and you shouldn’t call it a co-op. It confutes the customers.

There are many reasons why homeschool co-ops form and operate as nonprofit organizations rather than businesses. I already explained the first reason: volunteers. Here’s the more of reasons:

  1. Volunteers: a businesses cannot have volunteers working for it. A nonprofit can have volunteer labor. So homeschool co-ops that depend on volunteer labor are formed as nonprofit organizations.

  2. Ownership and Control: A nonprofit is not owned by anyone; the volunteer board runs the group and decides what everyone will get paid. The board can fire any staff including the Executive Director (the head honcho) and hire another Executive Director. The board can also vote to remove other board members including the founder. So if you want to remain in control, then you may chose to operate this homeschool group as a business. Don’t call it a co-op and don’t expect the parents to help out. Call it a homeschool service.

    This issue of ownership and control is a big stumbling block for many. Some homeschool leaders want so much to remain in control that they run their groups as a business owned by them. That’s perfectly legitimate. But then they miss out on tax benefits, donations, volunteer labor and the support of a board.

    I had a phone consultation with two women, former teachers, who wanted to start a homeschool program. Their lawyer joined in on the call. They said they were considering forming as a nonprofit and wanted 501c3 status as an educational organization. I explained that as the founders, they would have to surrender control to a board. They could serve on the board as volunteers. If they wanted to be paid, they would no longer be voting members on the board. They didn’t like the sound of that. They politely but firmly said they wanted to remain in control. So I advised them to operate as a for-profit businesses, likely a partnership. The call ended after 5 minutes. I never got to explain the rest of this list! Ownership and control was the tipping point for them.

    Many leaders, especially the founders, ask how they can remain in control and still lead a nonprofit group. I explain they cannot be in control, but they can influence who is on the board. Nonprofits can have the board replace itself with like-minded individuals. That keeps their vision and mission where they want it. This is mostly what they care about: keeping the vision and mission pure.

  3. A team/board helps carry the responsibility: When you run a business, all the responsibility is on your shoulders. All the profit is yours as well, but you don’t have anyone else to help shoulder the responsibility. It’s all on you. I frequently have this conversation with homeschool leaders. I explain the liability they carry for things like record keeping, taxes, background checks, rental leases, safety, insurance, hiring, firing and paying workers. Here’s a list of liabilities and responsibilities you carry as a business owner using a Classical Conversations Director in this case: Liabilities CC Directors Carry.

    In a nonprofit these responsibilities are carried by a group of people: the board. The workload is spread out. The treasurer handles the finances. The officers sign the leases. The board as a whole makes decisions.

  4. Tax exemption and tax deductible donations. Nonprofits who apply for 501(c)(3) tax exempt status with the IRS will be tax free on their surplus and can receive tax-deductible donations. Businesses cannot get tax exemption nor accept tax deductible donations. Any fundraisers belong to the owner and she must report it on her taxes as taxable income. So if you want and expect to get donation or grants, you should form as a nonprofit, not a business.

  5. Profit motive. Nonprofits have a mission other than profit. The purpose of a homeschool nonprofit is primarily education, but faith-based homeschool groups have an religious purpose as well. For-profits are presumed to have profit as their primary motivation. While many business owners are also motivated by an educational or even religious purposes, at the end of the day the general public, your customers, and federal, state and local governments all assume you are in business to make a profit.

  6. Other perks including Use of property-tax-exempt facilities such as churches, parks and libraries. Most churches, public parks, and libraries limit the use of their buildings to nonprofit organizations, so they can avoid paying property tax. A bushiness should notify the church, park or library that they are not a nonprofit homeschool group, but are a business.

Does that help you sort though the differences between running a homeschool group as a nonprofit or as you for-profit business?

I would estimate that probably 80-90% of homeschool groups are run as nonprofit organizations, primarily for reasons 1,3,4 and 6 (volunteers, teamwork, tax exemption, and use of tax-exempt property). For-profit business owners are swayed by reason # 2 (control) and #5 (profit).



For more information on forming your homeschool group as a nonprofit my books may be very helpful particularly:

Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out

The IRS and Your Homeschool Organization


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Can CC Director offered reduced tuition to her tutors?

 

Can a Classical Conversations director gift an Independent Contractor or employee with free or reduced tuition?

Suzy

 

Suzy,
A Classical Conversations (CC) Director can give educational benefits (i.e., discounts on tuition) to Independent Contractors (IC) or employees, but (and this is a big, “but”) the value of these educational benefits is taxable income and must be reported on their W-2 or 1099-MISC.

So a CC director can offer a tuition discount to an IC or employee, but must add the value of that discount to the tax reports she gives to her tutors (1099-MISC or W-2).

And the worker must report her paid wages and the value of this discount/gift on her tax return as taxable income. You should warn her about that in writing and face-to-face, so they aren’t surprised at tax time!

We think that taxable income is only what comes in a paycheck, but the IRS defines taxable compensation to include “educational benefits.”

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]  (my emphasis added)

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

So, yes, a CC Director can offer free or reduced fees to an Independent Contractor or employee, but it is not a gift; it is taxable income and must be included in their wage and income reporting.

A CC Director should also check her license agreement with Classical Conversations to see if reduced fees are allowed.

If you have additional tax questions about being a CC Director, I wrote an ebook that can help!
Taxes for Licensed CC Directors is available from Classical Conversation. Find it here
Carol Topp, CPA
HomeschoolCPA.com

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 https://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

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: https://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

BuyPaperbackButton

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