California’s new ABC test for Independent Contractors. How will it affect homeschool groups?

California’s new law (AB5) puts into affect the 2018 ruling by the California Supreme Court in the Dynamex case that makes it more difficult to treat workers as Independent Contractors. The new law uses an ABC test introduced in the Dynamex case. It’s a simple 3-part test that makes it more difficult to legally pay workers as Independent Contractors.

The California Supreme Court said that the worker could only be an independent contractor if each (meaning ALL) of these three factors was met:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact and
  2. The worker performs work that is outside the usual course of the hiring entity’s business and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

I recorded a podcast episode about the ABC test when it first came out. ABC Test for Independent Contractors (podcast episode)


How does this affect homeschool groups?

  • If your homeschool group is a nonprofit organization, these employment laws apply to your organization. Your nonprofit status (with or without 501c3 tax exempt status) does not exempt your organization from obeying the employment laws of the IRS and your state.
  • If you’re in a homeschool business, such as a CC Community, then you are affected by this ruling, especially if you live in California.
  • If you are an all-volunteer homeschool program (no one is paid), then this law does not affect you. 🙂

This blog post explains why I believe most teachers in a homeschool program should be paid as teachers: Why I think most homeschool teachers should be paid as employees


I’m a homeschool group leader. What do I need to do?

If you live in California, convert your teachers/tutors to employees starting January 1, 2020.

If you live in another state, strongly consider having me (or another qualified CPA) do a worker determination. There may be changes you can make to your homeschool program that are simple and inexpensive.

Will this spread to other states? What about the IRS?

Probably. I predict within 5 years, most states will adopt something like the California ABC test for Independent Contractor status.

So far the IRS is not using the ABC test, but they use similar criteria that causes me to conclude teachers in a homeschool program should be treated as employees not Independent Contractors. Read my reasons.

Which law do I follow? State or Federal/IRS?

The general rule is that you must follow whichever law is most generous to employees (not yourself as the employer or hirer). Federal and state default status is that workers are employees. The burden of proof is on the employer (your homeschool group) to prove they are eligible for independent contractor status.

I talked to a CPA about this a few years ago and he said we’re fine

or

My CC SR or AR said I’m OK treating my tutors as ICs; their lawyers know about the situation.

A worker determination should be in writing on the letter head of either a CPA, Enrolled Agent or attorney. Only those three professions are allowed to practice before the IRS. This determination, in writing and on the letterhead of the professional, may help abate any penalties for misclassifying workers if the IRS or your state audits you.

Do not rely on verbal statements. Do not reply on verbal statements made by CPAs, EAs or attorneys. Get it in writing. Do not reply on verbal statements made by non-CPAs, non-EAs or non-attorneys, no matter how reassuring they are that they have talked with a professional. Get an opinion specific to your organization in writing.

Ask for a statement in writing addressed to your particular business/nonprofit from a qualified professional who has assessed your situation in particular.

 

What if the parents pay the teachers directly?

or

My CC tutors are now sublicensees, not my Independent Contractors; I’ve been told that is OK.

The fact that you (as the homeschool group or homeschool business owners) do not pay the worker does seem to avoid the worker classification issue, but it introduces at least two other issues:

  1. You cannot control, supervise or direct that worker. They are their own business owner and you have no opportunity to oversee their methods or their performance. You cannot direct them; you cannot supervise them. Do you really want that? Would your parents accept this? You’re working with children, don’t you need to supervise and direct the people teaching the children?
  2. If you host your program at a church or other property-tax exempt facility (like a library), then the teacher/sublicensee tutor is conducting his or her business on church property. Does your church host know this? They may have a policy against conducting business on their property because it threatens their property tax exemption. Please refer to my Property Tax FAQ page for more information.

How can I learn more about paying workers?

My book will help


Paying Workers in a Homeschool Organization

  • Have a payroll consultation with Mary Musick, CPA (inactive) and current homeschool mom. Mary runs a bookkeeping service and will discuss payroll with you. It may not be as awful as you fear since you are probably hiring part-time, seasonal employees with no benefits. Her email is hfbkkpg@gmail.com.
  • Or have a payroll consultation with Jamie Buckland, The Classical Homeschool Consultant. Jamie runs payroll herself for her homeschool classical academy. She can do research on what your state payroll taxes are and reassure that if she can do it, you can do it! Jamie’s website is https://jamiebuckland.net/
Understand your risk, your legal and tax requirements, get compliant and get help! We don’t want homeschool organizations to get in trouble with the IRS or state agencies.

 

Carol Topp, CPA

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