A homeschool program charges $2,300 per student per year for tuition. Many of the teachers in the program also have their children enrolled in the program.
The leader, Lauren, was deducting the amount of tuition owed from the teacher’s pay and reporting only the difference that she actually paid the teacher.
Teacher’s earnings: $4,000
Tuition that the teacher owed: $2,300
Teacher’s paychecks: $1,700 ($4,000 less $2,300)
Additionally, Lauren was filing the teacher’s W-2 (or 1099-MISC) and reporting wages of only $1,700, but the true earnings were $4,000.
I advise that homeschool organization DO NOT net the teacher’s pay and her tuition owed like this!
Picky CPA reason: This netting (subtracting the amount paid to the teacher by the tuition she owed) masks the true amount of teacher pay and the true amount of tuition received in your bookkeeping. The homeschool leadership needs to know the total income from tuition and the total expenses paid for teachers. Netting them masks the true income and true expenses. Additionally, the total amounts of income and expenses must be reported to the IRS (usually on Form 990 or 990-EZ).
More important reason: Taxes!
The teacher’s payments for her services is taxable earned income. But her child’s tuition is a personal expense and not tax deductible.
I recommend that the teacher should be paid the full amount earned (in my example, $4,000) and in a separate transaction, she should pay her tuition to Lauren’s homeschool program.
Lauren was advised that she will need to amend the W-2s she gave to her teacher to correct this mistake. This will be an unwelcome surprise to the teacher, but it’s the correct, legal amount to report.
I know it seems like extra work and more complicated, but netting or offsetting the two transactions could distort the total amount of compensation the teacher needs to report to the IRS. It’s mixing taxable income with a non-tax-deductible personal expense.
That’s called tax evasion and the IRS doesn’t take kindly to tax evasion.
For more information on paying workers and correctly recording transactions in an accounting system, you may find my book, Money Management in a Homeschool Organization, helpful.
Carol Topp, CPA