Can excess supply fees be used to pay other expenses?

Our homeschool co-op charges families a registration fee to cover administrative costs and a per-class supply fees to cover supplies/materials for individual classes. This past year we have a pretty good surplus on supply fee income.  Teachers ended up not needing to purchase the supplies they anticipated.  But we are running a little short on the administrative side.  Are we able to use some of the supply fee income to cover those outstanding administrative costs?  Or should we leave that alone and dip into our contingency fund for those admin costs?  Any advice is greatly appreciated.

Thank you for being such a valuable resource to homeschoolers!
Regards, Julie

Julie,

Your homeschool nonprofit organization can certainly use excess supply fees to cover administrative costs. Your leadership has a fiduciary duty to manage the program and part of that is managing the finances to shift expenses around if needed.

The only time that shifting expenses is not permitted is if a donor specifically designates their gift be spent on a specific program or event. Then the nonprofit must honor the donor’s request. Many nonprofits do not accept designated gifts because it ties the hands of the leadership in using the funds where most needed.

In general, I advise homeschool groups to avoid multi-part fee structures, where every fee is tied to an expense. For example, some homeschool groups charge several fees: a facility fee, insurance fee, supply fee, etc. Instead of all these fees, I recommend homeschool groups do what private schools and colleges do: charge one large fee.

Your treasurer and board will know what needs to be paid from that fee (rent, insurance, supplies, etc), but then it is easier to pat all the expenses and not feel guilty!

Creating a budget

Need help creating a budget so that your fees cover all your expenses?

Money Management in a Homeschool Organization explains how to create a budget, monitor it, and inform your board of the financial health of your organization with clear, easy-to-understand financial reports. Specifically written for treasurers of homeschool organizations.


Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

IRS asks if homeschool groups gives scholarships

I am helping my homeschool co-op apply for 501c3 tax exempt status with the IRS.On the application form (Form 1023), the IRS asks about scholarships. We provide scholarships for our members that cannot pay their $30 membership fee.  Should we check “yes”?
Tricia from TX

Tricia,

The IRS is asking about “real” scholarships like the kind a high school graduate is given to go to college.

What your group offers is a fee discount, specifically a benevolent discount to a needy family. I find that co-ops frequently call these fee discounts “scholarships.” That is the wrong word to use when dealing with the IRS.

I wish I could wave a magic wand and get homeschool groups to stop calling a fee discount a “scholarship.” But I’ve been trying for about 15 years with no success!

I recommend that you change your wording in your co-op and especially change the word on your application to the IRS.

I think you should check the box NO. Your homeschool group does not provide scholarships as the IRS is using the word. Your group gives a benevolent discount.

By the way, your discount of $30 seems insignificant and it’s for benevolence.

But some homeschool groups give rather large discounts to super volunteers, teachers, board members, etc. One homeschool group was giving a board member $4,000 in discounts every year!  These large discounts may be taxable income to the volunteer or paid worker!


I recommend you get a copy of Paying Workers in a Homeschool Organization to help you stay legal and compliant with compensation reporting.


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

Homeschool Groups: Prepare for new 1099-K reports if you use Paypal, Stripe, Venmo, etc.

Lots of homeschool groups use Paypal, Venmo, Stripe, Square, etc. and other third party payment processors to collect dues and fees. That’s a great way for your group’s families to pay the organization easily.

For 2022, these third party payment apps will start sending everyone who receives more than $600 though their service a tax form called a 1099-K and a copy goes to the IRS. This means that your homeschool group will receive a 1099-K in early 2023 showing all the funds (if greater than $600 in the previous calendar year) that flowed through Paypal, Venmo, etc. and a copy goes to the IRS!

Here’s the law itself (scroll to page 94 of the 114 page pdf). It is part of the American Rescue Plan Act of 2021. The new rule is effective beginning on January 1, 2022. President Biden signed the law with the threshold amendment in March 2021.

What to do with a 1099-K when it comes in early 2023?

If your organization is a tax exempt, nonprofit AND your payment account is set up under the organization’s name AND uses the organization’s EIN (Employer Identification Number) as their tax ID, you have nothing to worry about!

You should simply give the 1099-K to the treasurer or your bookkeeper and she should check the amount for accuracy. Then file it away. Your tax exempt organization should be filing an annual IRS Form 990/990-EZ/990-N with the IRS every year. The amounts on the 1099-K will be included in the total revenues on this 990 Information return. But you will not owe additional tax on this money, because your organization has tax exempt status. 🙂 The IRS Form 990/990-EZ/990-N are information returns for tax exempt organizations, not tax returns.

How do I know if my Paypal, Venmo is in the organization’s name?

Log onto your third party payment processor. Go to Settings>Account Information and click around until you find a Tax ID section or Identity Verification (on Venmo). Also look for Account Type. In PayPal and Venmo you should have a Business Account, not personal account for your homeschool group.

How do I know if my group is a tax exempt nonprofit?

Look up your organizations name in the IRS Exempt Organization database. https://apps.irs.gov/app/eos/

Here’s an example from a charity I serve as treasurer:

When I click on the hotlink of the organization’s name I learned a few more details and see that this organization is update date with filing annual IRS reports.

If your organization is not listed or it says Revoked with a date, your homeschool group is not tax exempt and must correct that immediately. Start by reading the blog posts and contact HomeschoolCPA to apply for tax exempt status or get tax exempt status reinstated if it expired.

How do I know if we are using the organization’s EIN as our tax ID?

Log onto your third party payment processor. Go to Settings>Account Information and click around until you find a Tax ID section or Identity Verification (on Venmo). In PayPal and Venmo you should have a Business Account, not a personal account for your homeschool group.

What if our Paypal account is a person’s name?

Well, now you have a problem! Paypal (I’m using Paypal generically to mean any payment processor) thinks this account belongs to an individual and he or she will get the 1099-K. A copy goes to the IRS and the IRS will expect to see this money reported on that person’s individual tax return! Expect to get a panicked call from this individual! She will probably have to hire a professional tax preparer to help her report this money (which is not really hers) and deduct any expenses, so she avoids a large tax bill. She will be very unhappy with your organization!

Thanks to a member of the Homeschool Leader Facebook Group, Angie C. who called Paypal and shared this:
“I just got off the phone with a PayPal rep. He said that nonprofits have to have the SSN of the business representative in order to prove US citizenship. If a 1099-K is issued, it will go to the business and address associated with the EIN. If the EIN is invalid for whatever reason, the 1099-K will go to the SSN on the account.”

How to check your Paypal account: In Paypal go to Account Settings>Business Profile> Account Owner Information. Look under the Tax ID. There should be a number for the EIN.

If your Paypal account is in someone’s SSN, without any EIN, change that immediately. You may need to contact Customer Service. They will want verification of your EIN (the IRS letter you received when you applied for your EIN) and perhaps other documents such as proof you are a nonprofit and tax exempt with the IRS. If you do not have these documents, Paypal will likely close your account. So empty the cash first and create a new Paypal account under the name and EIN of your organization.

Here’s what to do NOW in the last weeks of 2021:

  1. Log onto all your third party payment processors (Paypal, Venmo, Zelle, etc). Verify that all the accounts are in the name and EIN of your organization. Verify that the address is up to date too. Take screen shots and save them permanently.
  2. Fix any incorrect information on the third party processor accounts. Take screen shots and save them permanently..
  3. Call the third party processor customer service if you have any problems updating your information online.
  4. Don’t have tax exempt status? Contact HomeschoolCPA to apply for tax exempt status. Start by reading these blog posts:

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Is Paypal a good option for a 501c3?

Our homeschool group is currently looking into using Paypal so that we can collect membership dues online. We had a few questions we hoped you could answer.
Is Paypal a good option for a 501c3?
Would using Paypal affect tax paperwork in any way?
Paypal charges a transaction fee. Does it make a difference whether we ask the individual to pay the fee or whether we pay the fee out of our budget?
Is there an online payment method that you would suggest other than Paypal?

Jessica B.

Jessica,

Lots of nonprofits use Paypal. It is a secure, convenient way to collect fees. Using Paypal or other electronic payment system doesn’t affect your “tax paperwork,” the annual IRS Form 990/990-EZ/990-N, reporting in any way. Just treat Paypal like a checking account. Money comes in, fees are paid out, and transfers go out to your bank checking account.

Reduced PayPal fees for 501c3 nonprofits

If you send Paypal your 501c3 determination letter from the IRS, they will reduce the fee from 2.9% to 2.2%.

It doesn’t matter if you increase your fees to cover the Paypal fee or just pay it out of your budget. It’s part of the cost of doing business. What is not allowed is to charge customers who uses Paypal more than those who pay in cash or by check. So you may have to increase the fees to everyone to cover the Paypal fees.

Alternatives to PayPal

I looked into other online payments for nonprofits. Some let you ask the donor/payor to pay the fee, but then they charge 4% or a high monthly fee which is not affordable for most small nonprofits.

I’m the treasurer for a charity (a food pantry). We request donations of $100 or more by by check to avoid giving Paypal too much in fees. One donor gave $1,000 via Paypal and we paid $22 in fees!

In my business I use Quickbooks Merchant Services when I have a large invoice (like $200 or more) to send to a client. I only accept payment by check or ACH (echeck), not credit card with QuickBooks. QuickBooks only charges $1.00 per ACH transaction. That’s a lot less than Paypal’s 2.9%.

I also use Stripe in my business, which is a lot like Paypal. I let clients pay me via Stripe if it’s under $100. I just “eat” the fee. I don’t increase my invoice if they want to pay with a credit card. But I wish more paid by echeck/ACH. Stripe only charges 0.8% for an ACH transaction. A lot less than 2.9%. https://stripe.com/blog/accept-ach-payments
So if your group’s membership fee is high, ask for payment by check or ACH, maybe via Stripe or Paypal. 

Please avoid using platforms like Zelle, Venmo or PayPal Friends and Family to avoid paying fees. These are for non-business money transfers only.

Instead pay the fees and be glad that these services exist. They allow for a convenient way to get paid securely and we shouldn’t expect a service like Paypal to be free all the time.

If you have more questions about managing money in a homeschool organization my book may be very helpful.
Money Management in a Homeschool Organization

I hope that helps.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Former CC Director explains the liability that she carried as a Director

Colleen Eubanks shares a video review of Classical Conversations. She was a tutor and Classical Conversations Licensed Director for two years.

About the 13:30 mark (roughly half way), she clearly explains some of the liability that she carried as a Licensed CC Director. Her concerns include:

  • Paying tutors as employees or Independent Contractor
  • Not being hired as an employee when a Director
  • Securing a facility to meet and being responsible to the building
  • Potentially jeopardizing the church’s property tax exemption by operating her for-profit business in a church

Since Collen owned another business in addition to directing a CC Community, she knew about employees and Independent Contractors. She also consulted her CPA in running her CC Community business. Smart woman!

She explains her concerns clearly and factually. All CC Directors should be aware of the liability they carry so they enter into a licensing agreement fully aware of these issues.

I hate to hear stories of CC Directors not being aware of the fact they are running a business! And it’s very unfortunate when a church learns that a business has been operating on their property and asks the CC Community to leave. That gives homeschool groups a bad reputation with churches.

Listen to her comments at the 22:20-23:16 minute mark. She encourages CC Directors to fully understand the kind of business they are setting up and that just because it is a low-profit (or no profit) business does not make it a legitimate, nonprofit organization.


Are you considering converting your CC Community from a business to a legitimate nonprofit organization?

My webinar on Create A Nonprofit for Your Homeschool Community can help. It’s only $10 and runs 90 minutes. Typically you would pay $150 for an hour and a half of my time, so the webinar is a bargain.

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

Handing out gift cards? Here’s how to record them

Vicki Boatright is a bookkeeper for churches (and other nonprofits). I have found her blog posts at Free Church Accounting and ebooks very helpful as I advise homeschool groups.

Gift cards as thank you gifts


In a blog post on FreeChurchAccounting.com, Vicki explains how to record gift cards that your organization may be buying and then passing out as gifts to volunteers or as benevolent gifts to a needy family.

Gift Cards: Were any gift cards purchased for staff, gifts/prizes, or benevolence? Those have to be “tracked”! We try to watch and catch them as soon as the church purchases them, so we can set up as a “cash on hand” account  in their accounting system. We then have to manually enter the “expense” each time a card is used or given away.

Lisa London, has a great article on how to handle gift cards on her “accountant beside you” site and provides a free log that you can use to track those gift cards! 

So in your homeschool group, you probably buy some gift cards to hand out as thank you gifts at the end of the year. You enter these purchases of gift cards as “Appreciation expense” probably as a General and Administrative expense in your bookkeeping.

If you purchase a stack of gift cards and don’t give them all away right away, then they need to be recorded as an asset just like cash in the bank. This could be called a “gift cards on hand” asset account. That’s what Vicki is talking about in her blog post I quoted above.

For more information on money management in a homeschool organization purchase my book Money Management in a Homeschool Organization.


Gift cards to a needy family


If you are helping needy families with gift cards, I condemned you! But be sure that you have clearly stated in your Articles of Incorporation, bylaws and IRS 501c3 Application that you have a charitable purpose as well as a educational purpose. You see, helping a needy family with a gift card is not in accordance with an educational purpose; it is a charitable act.

If your organizational documents and your IRS application only states your group has a educational purpose than you must stick to educational discounts to help a needy family.

Read this story of a homeschool group that I had to advise to stop their charitable activities. I didn’t like telling them that, but I didn’t want them to get in trouble with the IRS!

Can a homeschool group be charitable? Maybe not!

Carol Topp, CPA

HomeschoolCPA.com

Tax and record keeping help for CC Directors

Carol,

I will be a director with Classical Conversations (TM) for the upcoming year and I wanted to keep track with all finances and stay on top of all the things for taxes but I am unsure of how to do that or find someone knowledgeable with something like Classical Conversations.

Would you be able to direct me in a better direction with things?

-Jillian M


Jillian,

Good for you to realize that directing a Classical Conversation program is a business and you need to be concerned about taxes and record keeping. Sadly, I have heard from many CC Directors that they had no idea they were running a business. Some have made terrible mistakes in their tax filings.

I have several resources for you:

Taxes for Homeschool Business Owners

The ebook is 60 pages long and contains information on

  • Business Start Up
  • LLC status
  • Tax Deductions
  • Tax Forms
  • Sample Tax Returns
  • Self Employment Tax
  • Paying Yourself
  • Paying Others
  • Businesses Using Churches
  • Should My Homeschool Program Be a Nonprofit?

Business Q&A for CC Directors: Answers You Need to Run Your CC Business

This 50 page ebook is a collections of questions CC Directors have asked the HomeschoolCPA, Carol Topp, CPA over the past few years. Carol answers each question and cover topics such as:

  • Business Set up: LLC status, nonprofit, ministry or business, checking accounts, record keeping
  • Relationship with your church-host: taxes for the church
  • Taxes: What forms to file, 1099-MISC, tax deductions
  • Employees: Independent Contractor or employee

I hosted a webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to you as a CC Director. You can watch the recording at HomeschoolCPA.com/HSBIZTAXES for a small fee of $10.


Bookkeeping spreadsheet for CC Directors is a free download.

I hope that helps!


Carol Topp, CPA
HomeschoolCPA.com
Helping homeschool leaders

Getting an EIN from the IRS

Many homeschool organizations find they need to open a checking account for their group expenses. The bank or credit union will ask for an EIN, Employer Identification Number. This number is similar to a Social Security Number for a business or nonprofit organization. It’s actually misnamed. You don’t need to be an employer to obtain an EIN. They are offered for free by the IRS.

Sometimes a leader opens a checking account and uses her Social Security Number (SSN). This is not recommended. If a personal checking account is used for handling the homeschool organization’s business, the cash in it could be seen as the leader’s personal income in the eyes of the IRS. I’m sure she doesn’t want that! Additionally, an unpopulous leader could run off with the money that is the organizations and there is nothing the organization can do about it!

Before you get an EIN

Before you get an EIN, you must first properly and legally form a legal entity. The IRS puts it like this: “If you believe your organization qualifies for tax exempt status (whether or not you have a requirement to apply for a formal ruling), be sure your organization is formed legally before you apply for an EIN.

To legally form a nonprofit organization you need three things:

  1. A board of at least three people (preferably unrelated).
  2. Bylaws which explain the mission and structure of the organization. If you don’t have bylaws. Sample bylaws are available at HomeschoolCPA.com/Samples
  3. An “organizing document” which would be either Articles of Incorporation (highly recommended and most common) or Articles of Association for an unincorporated association. Articles of Incorporation are filed in your state, usually the Secretary of State office. Most states have a form for you to use.

Sample Articles of Incorporation or Articles of Association are available at HomeschoolCPA.com/Samples.

I compare forming a new organization to birthing a baby. Only after the baby is born can you apply for a SSN. The same is true for birthing a nonprofit organization. First the “baby” nonprofit must be born by a board drafting bylaws and filing Articles of Incorporation with their state. Then the baby nonprofit can apply for an EIN.

Getting an EIN from the IRS

Go to www.irs.gov/taxtopics/tc755.html for more information on the EIN. The IRS uses Form SS-4. I highly recommend you look it over carefully. Keep a copy for yourself.

To get your EIN quickly, apply on line by going to the IRS Online EIN service at https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

After all validations are done you will get your EIN immediately upon completion. You can then download, save, and print your EIN confirmation notice.

EIN Tips:

  • Under Type chose” View Additional Types” and then “Other Nonprofit/Tax Exempt Organizations.” Educational organizations (which is what homeschool groups are, falls into this category).
  • Under “Reason for applying,” check the box “New business” or “Banking purposes”
  • The “Responsible party” is the person who exercises ultimate effective control over the entity. This is any one of the officers (Chair, Secretary or Treasurer). Some people are concerned about giving their Social Security Number to the IRS. This does not tie your personal taxes to the homeschool organization. It’s just the IRS’s way to be certain a true, living human being is applying for the EIN. The Responsible party can be changed in the future by filing IRS Form 8822-B. 
  • Your name on the EIN must match your legal name chosen when you filed Articles of Incorporation with your state’s Secretary of State.

If you have questions about applying for an EIN or the Form SS-4, read the chapter on “Checking Accounts Done Right” in my book Money Management in a Homeschool Organization

If you have questions about setting up or running your homeschool organization, visit HomeschoolCPA.com or consider a private phone consultation.


Carol Topp, CPA

HomeschoolCPA.com

Homeschool teachers or CC tutors: Stuck inside? Start doing your taxes!

Who would have thought that when I wrote this blog post in March 2020, that we would still be stuck inside because of the COVID-19 pandemic?

But tax season rolls around each year. So here we go again!

Are you stuck inside because of illness, social distancing, or the corona virus? Well, it’s a good time to work on your tax return!
(Not what you wanted to hear, I’m sure!)


I hear from lots of CC Directors and tutors about their taxes. It can be confusing running a business, paying tutors, etc.

If you’re confused about takes, I have a book for you!

I am pleased to offer my book, Taxes for Homeschool Business Owners!
Read more here.

I have spoken and emailed with so many CC Directors, tutors and teachers at homeschool programs that are confused about their taxes. This is my attempt to keep you out of trouble with the IRS!

This ebook is a great resource for:

  • Tutors or teachers for a homeschool program paid as an Independent Contractor
  • Classical Conversations(R) Directors
  • CC tutors
  • Coaches, musicians, artists, etc. hired to teach at a homeschool co-op


The ebook is 60 pages long and contains information on

  • Business Start Up
  • LLC status
  • Tax Deductions
  • Tax Forms
  • Sample Tax Returns
  • Self Employment Tax
  • Paying Yourself
  • Paying Others
  • Businesses Using Churches
  • Should My Homeschool Program Be a Nonprofit?

I hope you find the ebook helpful this tax season!

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders