Can a Classical Conversations director gift an Independent Contractor or employee with free or reduced tuition?
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.
Ok, let me get this straight. So a discount may be offered, but THE DIFFERENCE btw what non-teaching families’ tuition amounts and what the tutor has to pay for their own child(ren)’s tuition must be reported as taxable income?
Lisa, Yes I think you understand it correctly.
CC hires tutors as Independent Contractors. Since ICs cannot receive benefits like an employee, any discount on tuition is taxable income.
So it works like this:
Tuition owed by every family (nonteaching family as you call it): $1,000
Discount given by CC Director to her tutor: $200
Tutor owes tuition of $800 to the Director.
Tutor’s pay for teaching: $432
The 1099-MISC for the tutor will show her actual pay of $432 PLUS her discount of $200 for a total of $632.
I hope that helps.
Carol Topp, CPA
Ah! Because the teachers are Independent Contractors in CC.
So, what if the teachers are EMPLOYEES? Do they still report the discount as a taxable benefit?