I run a homeschool tutorial in Texas as my small business. My tutors should be classified as employees according to the IRS rules. Due to the expenses and paperwork involved with hiring employees, I would like to set up a 501(C)(3).
I would like to hire you to help me with the process of setting up our local group as a 501(c)(3). Can you help me begin the process of setting up as a 501(c)(3)?
B in Texas
Dear B,
You should understand that having 501(c)(3) tax exempt status does NOT change the employer or payroll taxes you would have to pay.
501(c)(3) tax exempt status only grants nonprofit organizations tax exemption from federal income tax, not the payroll taxes. In other words, nonprofit tax exempt organizations still have to pay payroll taxes such as SS/Medicare, workers comp, unemployment insurance premiums.
Additionally, forming your business as a nonprofit organization means that you are no longer in control of the organization, nor does the money belong to you. The organization must be run by a board. The board can hire you as an employee, but they can also fire you.
Because you are converting a for-profit business to a nonprofit organization, you are not eligible to use the IRS’s short online Form 1023-EZ application form. Instead you will have to use the longer Form 1023 to apply for 501(c)(3) tax exempt status.
So you need to carefully consider your motives in forming a nonprofit, tax exempt organization. It should be done for reasons other than the expense and paperwork of hiring employees, because that burden will still exist as a 501(c)(3) tax exempt nonprofit organization.
Need help understanding the rules regarding paying workers in your homeschool organization? My book Paying Workers in a Homeschool Organization will explain the difference between employees and Independent Contractors and the necessary forms to file.
Carol Topp, CPA
