Worker Classification Test By State

I found this helpful website that explains the test that each state in the US uses to classify workers as employees for Independent Contractors.
This is important for homeschool groups that hire and pay workers, especially teachers or tutors, to understand.

https://www.wrapbook.com/blog/worker-classification-tests-by-state

The article compares the two main tests:

Common law test (presumes the worker could be a contractor)

and the

ABC test (presumes the worker is an employee)

The Common Law test is used by the IRS, New York, the District of Columbia, and 17 other states

Currently, the ABC Test is used by the U.S. Department of Labor and 33 states.

Visit https://www.wrapbook.com/blog/worker-classification-tests-by-state and look up your state. Then determine if you pass the tests for your state and the IRS!


If you are unsure how to classify the workers in your homeschool group, HomeschoolCPA can help:

My book Paying Workers in a Homeschool Organization can help clear a lot of confusion, but perhaps you want to discuss your particular situation in a private, individual phone consultation.

I offer phone consultations to help you determine if your homeschool organization’s workers are employees or independent contractors. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps.

To request a consultation, please contact me. I’m happy to help and relieve any anxiety you have about this confusing topic.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Biden’s DOL adopts ABC test for workers. What does this mean for homeschool groups?

I subscribe to a lot of e-newsletters and a really good one is Free Church Accounting. Vicki Boatright has helpful bookkeeping advice for churches and nonprofits like homeschool groups!

Her latest article is about classifying workers as employees or Independent Contractors (IC) and the changes at the federal level (Department of Labor) made by the Biden administration in 2021.

https://www.freechurchaccounting.com/misclassification-of-workers.html

Here’s some highlights of what she says:

“The Biden administration expressed their desire to “pattern” the federal standard for classifying ICs closer to CA’s ABC Test. So earlier this year, the U.S. Department of Labor stopped Trump administration rules that utilized a five-part test for classifying worker and would have made it easier to identify and properly classify workers as ICs and started classifying ICs under the ABC Test.”

“So how will this affect you? Well, unless your musician, custodian, or nursery worker owns their own business and does a similar “job” for other business and organizations, you should be paying them as employees.” (my emphasis added)

https://www.freechurchaccounting.com/misclassification-of-workers.html

She goes onto give some helpful tips for classifying common workers in a church like nursery caregivers, custodians, musicians, etc. Then she really gets serious and mentions the severe criminal and civil penalties for misclassifying your workers as Independent Contractors.

This is serious and scary stuff!

She ends with this warning:

“Remember, a blaring red flag for the IRS is an individual who receives one 1099 from the same organization every year!”

https://www.freechurchaccounting.com/misclassification-of-workers.html

She sounds little bit like me, doesn’t she? I’ve been warning homeschool leaders for years that most teachers in a homeschool organization should be paid as employees because:

  1. The homeschool group controls the teacher (you have to control the teachers for the safety of the children) and
  2. The teachers provide the key activity of your organization.

Read her whole article. It’s worth the time.

Then read my book Paying Workers in a Homeschool Organization.

And these blog posts: https://homeschoolcpa.com/why-i-think-most-homeschool-teachers-should-be-paid-an-employees/

https://homeschoolcpa.com/what-are-the-consequences-of-misclassifying-a-worker/

https://homeschoolcpa.com/californias-new-abc-test-for-independent-contractors-how-will-it-affect-homeschool-groups/

And finally read about the IRS amnesty program if you’ve been paying teachers as ICs: https://homeschoolcpa.com/irs-amnesty-program-for-employers-how-to-avoid-penalties-for-paying-workers-as-independent-contractors/

Happy New year! (Ugh!)

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Form an LLC to homeschool your own children: Good idea or not?

Hi Carol, I love your website – so much great information!
Can I incorporate and form an LLC where my husband would hire me/my company to teach our children? If not, would I need to start some sort of online “resources for homeschool families/consulting” company in order to incorporate?
Thanks so much, Allison

Allison,
Thank you for the kind words about my website. I’m glad to hear it was helpful.

I’ve been asked questions like yours before.

Here’s a blog post on a similar question:
“Incorporate yourself and write off homeschool expenses.” Really?

And in this blog post, I explain why your idea to incorporate or form a business as an LLC and be hired by your husband to homeschool your own children doesn’t work from a financial and tax perspective:

“Sometimes homeschool families try to get clever and think that they will form a homeschool business and deduct the expenses. The idea is for the dad to hire his wife to teach their children. Then they can deduct school supplies, the mom’s wages as a homeschool teacher, etc.
Sounds pretty clever, huh? Except it doesn’t work anymore than paying mom to cook and feed the family by running an “in-house restaurant” won’t work. That’s because in both these plans (homeschooling as a business and in-house restaurant) there are no customers that are paying for the mom’s services.
Also, the mom has to declare her income to the IRS and she will have to pay taxes on it! That’s why families don’t hire mom to run an in-house restaurant and they shouldn’t hire mom to homeschool the kids either.
So forget the idea of forming your family homeschool as a business.”

Let me explain the cash flow a bit and why this idea doesn’t work.

Mom forms a business. Her only customer is her husband. They agree to pay her business $20,000 a year to homeschool and teach the children.
Dad moves $20,000 from the couple’s checking account into Mom’s business checking account. By the way, Dad has already paid income tax on this $20,000. Let’s assume its about $2,400 in federal income tax he has paid using a 12% tax rate.

Mom pays for supplies to homeschool her own children from the business checking account, which may not be allowed by the IRS as a business deduction because it is a personal expense of the business owner, but we’ll ignore that fact for now.

At the end of the year Mom’s business has a profit of $15,000.

She files a tax return (and pays extra for a tax professional or tax software to prepare the business’s tax return). She must pay federal income tax on her business profit of $15,000. It will be about $1,800 in federal income tax assuming a 12% tax rate. Remember that Dad already paid $2,400 in federal income tax on this money when he purchased Mom’s services!

In addition, Mom will pay Self-Employment tax of 15.3% of her $15,000 profit. That comes to $2,295 more in tax. Self-employment tax is Social Security and Medicare tax for self-employed people.

Did Dad get to deduct the $20,000 he paid to Mom’s business? No! Why not? Because nowhere on the IRS Form 1040 is there a deduction for homeschooling expenses! They are personal expenses for Dad and not tax deductible!

So in total Mom pays an additional $4,095 in federal income tax with this idea.

Creating a business to homeschool your own children doesn’t make sense from a cash and tax perspective!


If you are interested in starting a business to the homeschool market, my ebook Taxes for Homeschool Business Owners will be a big help.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Liabilities that CC Directors carry

I have been concerned for many years about Classical Conversations Directors and the liability that they carry when they sign a licensing agreement with CC.

My main areas of concern include:

Areas of liability for CC Directors

Safety of children participating in the Community day including physical, health and safety concerns. This means that the Director should be conducting Background checks on all participants. She also needs to have a two-deep policy meaning that two adults be in the room with children at all times. The Director needs to follow state guidelines on COVID-19 precautions and other health codes.

Building use which includes a rental lease agreement, property insurance, fire codes, conducting fire drills, ensuring the building is safe and secure.

Potentially jeopardizing the church’s property tax exemption by operating a for-profit business in a church.

Business licenses and business registration.

Daycare licensing if the Community has a nursery or childcare for pre-school children.

Hiring tutors. Training tutors. Employment agreements. Paying tutors as employees not Independent Contractors. Potential fines and penalties for misclassifying workers. Payroll processing, including payroll taxes.

Illegally using volunteer labor. Businesses cannot use volunteer labor. They must pay everyone working in their business.

Tax reporting of their own income and expenses as well as Form 1099-NEC reporting to the tutors and other workers.

Fiscal management including invoicing families, record keeping, paying bills, paying tutors

Conforming with all CC licensing requirements on delivering the program, hosting informational meetings, attending Practicum training, submitting to the Support Reps, Area Reps and others up the CC chain of command.

Mandatory reporting requirements of suspected child abuse or neglect. The Director will need to be eyes and ears everywhere.

Negotiating conflict between families, between parents and tutors, between children (bullying), etc. If not handled well, these can result in lawsuits against the Director as the businesses owner.


Nonprofit homeschool programs face some of these issues (but not all), but they have a board of leaders and volunteers to help comply with all these areas. All the responsibility is not on one person in a nonprofit organization.

CC Communities are different. CC Corp pushes all the liability for the operation of the Community onto the shoulders of the local licensed Director. She is carrying this burden alone.

Read more about directing a CC Community

If you’d like to hear a former CC Director address the issue of liability on CC Directors, watch her video at : Former CC Director explains the liability that she carried as a Director

If you want to investigate the reality of being a CC Director join these Facebook groups:

Let Us Reason for Real Facebook group

Talk Classical Conversations
Their are CC-endorsed Facebook groups, but they are heavily monitored and do not encourage open discussion or allow questions that may seem critical of the program or CC Inc.. So alternate groups like these have been formed.


I know this is a sobering topic. My concern is that CC Directors fully understand what they are getting into before signing (or resigning) a licensing agreement.

There is a better, easier way to run a homeschool organization that doesn’t involve one person carrying all this liability. It’s called running a nonprofit homeschool program independent of a CC licensing agreement. Thousands of homeschool leaders have been doing that for decades.

Read my book Homeschool Co-ops: How to Start Them, Run Them and Not Burn Out and join this Facebook group I am a Homeschool Group Leader


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

IRS reinstates 501c3 status for homeschool music program

I am so pleased and relieved to announce that First Colony Homeschool Ensembles (FCHA) in Texas has had their 501c3 tax exempt status reinstated!

This case was particularly complex.

Over a year ago FCHA contacted me. FCHA had applied for and been granted 501c3 status back in 2016, but the CPA helping them incorrectly told the IRS that FCHA was a private foundation. They are not; they are a public charity because their support comes from member families, not a single wealthy individual.

Additionally, FCHA had no idea they needed to file annual reports with the IRS (the CPA never told them), so their 501c3 status was revoked after three years in 2020. We hoped that the IRS would reinstate FCHA’s 501c3 status and reclassify them as a public charity at the same time. Otherwise, FCHA was looking at a hefty $500 fee to get the private foundation classification corrected and may have to file prior year tax returns as well. 🙁

I had not tried to both reinstate 501c3 status AND switch to public charity at the same time.

But it worked! After a long wait (9 months) the IRS requested additional information which FCHA promptly and easily gave them, and the IRS reinstated 501c3 status and correctly classified FCHA as a public charity!

It was a long, slow process, but ended as we hoped! Now FCHA can continue serving homeschool families in Texas assured they are correctly classified as a 501c3 tax exempt organization.


Does your homeschool group need help with applying for 501c3 tax exempt status? HomeschoolCPA is here to help. Start by reading The IRS and Your Homeschool Organization.

Have questions? Contact us today and we can set up a phone or Zoom consultation.


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Parents paying homeschool teachers is getting cumbersome

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Hello Carol,

I am the Executive Director of a 501(c)3 non-profit homeschool co-op. We have always had all parents pay teachers directly for classes. Of course the number of checks written by members each semester,and unraveling the missing/lost checks each semester along with the myriad of other payment mysteries has prompted to us to wonder if we can have all parents submit the teacher payments to our group, then we cut a check to each teacher.

We would essentially gather all the money and then direct it to each teacher. One check from each parent for all their children’s classes, and one check to each teacher for all the classes they are teaching.

Can we do this?

Holly

Holly,

Thank you for contacting me.

Yes, you can collect all the payments from parents and then pay the teachers. This is how many homeschool groups, private schools, and college operate. But there are some things to warn you about:

1. Managing more money means you need good accounting software (links to some of my blog posts with software recommendations), one that can invoice parents and track who has paid and who still owes.

2. Additionally, since you have a lot more income, you may have crossed an IRS threshold and now need to be filing the annual Form 990 or 990-EZ (YouTube video explaining which form you need to file).

3. Worker classification. You need to determine if the teachers are employees or  Independent Contractors (opens a blog post series on worker status). This is not an easy determination to make. You need to consider many factors.


My book, Paying Workers in a Homeschool Organization. helps homeschool leaders determine if their teachers are employees, Independent Contractors or something else.

I also offer phone consultations to help you determine if your homeschool organization’s workers are employees or independent contractors. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps. Worker Classification consultation.

Save

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Volunteer board members are not held liable

I just learned (through TheRoysReoprt) that volunteer nonprofit board members are frequently immune from any liabilities facing the nonporift.

Compensated board members may not have that same protection. That’s one of the reasons why many nonprofit experts discourage paying board members.

I frequently explain to homeschool group leaders that board members in a nonprofit should not be compensated. There are lots of good reasons for that and here’s one more:

Serving as a volunteer board member means that you will not be held liable for civil lawsuits, injuries, deaths or loss.

This volunteer protection may vary by state. I’m in Ohio and Ohio laws says this:

A volunteer is not liable in damages in a civil action for injury, death, or loss to person or property that arises from the actions or omissions of any of the officers, employees, trustees, or other volunteers of the charitable organization for which the volunteer performs services…”

https://codes.ohio.gov/ohio-revised-code/section-2305.38

Now almost all laws have caveats, so read the full law in context.

https://codes.ohio.gov/ohio-revised-code/section-2305.38

A volunteer is not immune from liabilities if:

  • With prior knowledge of an action or omission of a particular officer, employee, trustee, or other volunteer, the volunteer authorizes, approves, or otherwise actively participates in that action or omission.
  • After an action or omission of a particular officer, employee, trustee, or other volunteer, the volunteer, with full knowledge of that action or omission, ratifies it.
  • An action or omission of the volunteer constitutes negligence, willful or wanton misconduct, or intentionally tortious conduct.

In other words, knowingly committing an action or omission, being grossly negligent, or willful misconduct (to name a few) is not immune from liability, even for a volunteer.

So do you job as a board member, manage the organization well, put the interests of the organization before your own, and don’t lie, cheat or steal!


You might find my Board Member Manual helpful as you understand board duties. It’s a template for organizing your nonprofits important papers and a board training manual.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Can homeschool groups benefit from being a Private Membership Association (PMA)?

I have had several homeschool leaders contact me in the past few weeks asking about Private Membership Associations (PMAs). I had not heard that term before so I did some research.

I learned that PMAs are businesses or nonprofit organizations that have “members” like the Boy Scouts, a country club, a food co-op, or the National Rifle Association. Some homeschool groups have members. So do churches.

But then I kept reading and heard some statements that are hard to believe.

One of my clients gave me a link to a YouTube video of a webinar featuring a self-declared expert in PMAs (and an alternative called PEA-Private Education Associations), David Edwards, who clearly states he is not a licensed attorney. I am not linking to the video because I don’t want you to waste your time watching it! And I don’t want to be promoting it via my website.

Here are some things Edwards or the hosts of the webinar say:

  • (If you operate as a PMA) there is no authority for the government to tell you what to do.”
  • (for PMAs there is) “no government intrusion in your life.”
  • “If you are in the private domain you are no longer under the jurisdiction of the local state and federal government”
  • “If you’re educating within a private education association they (the government) can’t infringe upon any of the activities of your association or require that you turn over any documents to them”

The people in the video also advocate relinquishing your 501c3 tax exempt status, and says there is no need for general liability insurance and no need to look into daycare licensing.


Some of these claims are hard to believe. Some of it sounds too good to be true. And I believe it is.

In my research I came across a few court cases involving a PMA defense. Two especially sad cases were two newborns who died at the hands of unlicensed midwives in Indiana and Tennessee. Both midwives claimed they were not under any government jurisdiction and could not be sued because they were “a PMA.”. The courts determined otherwise, See https://www.thedailybeast.com/two-babies-die-in-care-of-conspiracy-minded-midwives-who-belonged-to-pmas

The advocates of PMAs and PEAs in the video and other related websites make a lot of vague promises and vague threats. They frequently claim that this information about PMAs was “hidden” until they started promoting it. The video promotes PMAs, PEAs, and Edward’s services. One of my clients was quoted $1,500 to draw up their “PMA paperwork.” (remember Edwards is not an attorney).


“The fake legal claims derive from the sovereign citizen movement,” said JJ MacNab, an expert on anti-government extremism. “It’s all phony legal theory. There’s nothing real there. If you look at the history of the sovereign and tax-protest movements, this is just a rehashing of an earlier scheme called the ‘pure trust.’ They just repackaged it,”

JJ MacNab, a fellow at George Washington University’s Program on Extremism quoted from https://www.thedailybeast.com/two-babies-die-in-care-of-conspiracy-minded-midwives-who-belonged-to-pmas

What the promoters of PMAs and PEAs don’t seem to tell you are the disadvantages of a PEA/PMA, the tax consequences of relinquishing your nonprofit or 501c tax exempt status, and the liability exposure you may have by not having liability insurance.

Sometimes it’s not just what people say, it what they are not saying that you need to be careful about!

That is very true in this situation.

If you would like to understand PMAs and PEAs for your homeschool group, I recommend that you contact an attorney.

Or for a consultation about 501c3 tax exempt status and 508 of the Internal Revenue Code (it was mentioned several times in the video) for homeschool organizations, you can arrange a consultation, a licensed CPA. Me! 🙂

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Political restrictions on 501c3 status. Should homeschool group not get 501c3 status?

Do you have an article on the pros and cons of tax exemption? I’m thinking we would like to just incorporate with the state and not apply for tax exemption. I don’t like the restrictions on endorsements for tax exemption.
-Gretchen

Dear Gretchen,

Most homeschool groups apply for 501c3 tax exempt status as educational organization for the benefits it brings.

Main pros of 501c3 status are:

1. Tax exemption. Not paying federal or state income tax. Sometimes exempt on state sales tax and property tax too.

2. Can accept tax deductible donations

3. Discounts and some programs only available to 501c3s like Box Tops, TechSoup software, use of libraries, churches, etc.

Main cons are:

1. Time and money to apply and maintain tax exempt status (but paying taxes takes time and money too!)

2. No endorsement of candidates for public office

It’s this last issue that concerns Gretchen. She wants her homeschool group to be able to endorse political candidates. But endorsing political candidates is prohibited by 501c3 organizations.

501c3 nonprofits can lobby on behalf of legislation, but endorsing a candidate is not allowed. I for one would not want my local homeschool group to endorse a candidate. It can be too divisive. Of course, any member can endorse a candidate, just not the organization.

The reason for this restriction is so that tax deductible donations that the 501c3 nonprofit receives will not be used for political campaigns. The donations are to be used for the nonprofit’s mission, but not to bolster the coffers of a political candidate. Additionally, American taxpayers can contribute to a candidate, but the IRS does not think that entitles them to a tax deduction. I agree with this reasoning. I don’t think nonprofits with 501c3 status should be using their funds or time to support a political candidate.

Most homeschool organizations find they can live with this limitation and enjoy the benefits of 501c3 status.

Some state-wide homeschool groups have tax exempt status as 501c4 Public Benefit Organizations so that they can endorse homeschool friendly candidates. 501c4 Public Benefit Organizations can be politically active and endorse candidates, but contributions to a 501c4 Public Benefit Organizations are not tax deductible donations.


For more information on the advantages and disadvantages of 501c3 tax exempt status for homeschool groups, please read:

Start with Do we need 501c3 status?
My book The IRS and Your Homeschool Organization


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

My homeschool group wants to be a 508 PMA not a 501c3. Can you help?

Hi, we are creating a homeschool pod. I was wondering if you think 501c3 or 508 is better for us. We would like to be a PMA.

Hello, I am interested in a conference call. We are looking at getting a 508(c)(1)(a). Have you experience with these?


I have been hearing from homeschool leaders like the two above about PMAs (Private Membership Associations) and 508 status for a few months.

I am familiar with Internal Revenue Code 508(c)(1)(a) . It is not a tax status by itself. For example I never hear, “I want to be a 508c1a” like I hear “I want to be a 501c3”. 501(c)(3) is a part of the IRS code that offers tax exempt status to qualified nonprofits including churches, charities, and educational organizations including most homeschool groups.

Instead, IRC 508, and specifically 508 (c)(1)(A), is a section of the IRS Code explains when a 501(c)(3) nonprofit organization does not have to officially apply for 501(c)(3) status.

The IRS gives “self declared” tax exempt status ability to two groups:

  1. churches
  2. tiny nonprofit organizations with less than $5,000/year in revenues

So when someone says they want to be a “508”, I have to ask:
“Do you plan to form a church?” I do not support the view that homeschool groups qualify to be churches (although some churches operate homeschool groups). But many homeschool groups have a religious purpose without being a church.
“Will your homeschool group be that tiny?” It’s pretty hard to operate with less than $5,000 in revenues per year unless everyone is a volunteer and fees (especially rent) are minimal.

If the homeschool group will have revenues of less that $5,000/year then section 508 (c)(1)(A) allows them to self declare 501(c)(3) tax exempt status. How to self declare your 501c3 tax exempt status. They should not call themselves a “508.” 508 is not a tax status. It is a clarification of the tax code that applies to qualified 501c3 organizations (churches and tiny organizations). There is no such thing as a “508” nonprofit organization. They are a 501c3 organizations (churches and tiny nonprofits) that self declared their tax exempt status.


There seem to be several blogs, websites and YouTube videos that promote IRC 508(c)(1)(a) as a status offering some hard-to-believe advantages such as :

  • no government intrusion
  • “true” separation of church and state
  • Not “signing away the rights of a organization or church to the IRS bureaucracy”
  • Free to serve God as a recognized minister of the Gospel of Jesus Christ

These advantages are not mentioned in IRC 508(c)(1)(a). Read it for yourself. It is actually quite narrow in scope and does not offer lofty, vague promises like freedom from government intrusion.


I find a lot of incomplete and even somewhat misleading information about IRC 508(c)(1)(a) on websites and videos about Private Membership Associations (PMAs) that I have been reading and watching.

Please read the IRS code yourself and maintain healthy skepticism when something sounds too good to be true.

It usually is.


I’ll post a separate blog post about PMAs Private Membership Associations and the research of three court cases where claiming to be a PMA did not allow the business owner to operate outside the law.

Of you have more questions, please Contact HomeschoolCPA. We can set up a phone consultation or Zoom meeting to discuss your homeschool group’s questions.


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders