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Frequently
Asked Questions
HomeschoolCPA has collected some commonly asked questions about non-profit status and organization from homeschool group leaders. I hope you find them helpful.
I also answer several questions on my HomeschoolCPA blog. Visit my blog to see if your question has been answered there. If not feel free to send me an e-mail.
My homeschool group earns some money as a fund raiser by cleaning up our county fairgrounds. Do we have to pay taxes on this money?
Normally income earned from an activity unrelated to your mission is called Unrelated Business Income and subject to income tax by the IRS. Cleaning up the fairgrounds is not related to your mission of providing services to homeschooling families, so it is an unrelated business income. But the good news is that the IRS will allow this income to be tax exempt if the work is preformed by volunteers. You told me that your homeschool group families are all volunteers-no one is paid. So you do not have to pay taxes on this income.
[back to top]
Can we pay our volunteer director a small stipend? She works so hard.
I'm sure she does work hard and deserves some show of your appreciation, but volunteers are not paid. As soon as they are paid they are not a volunteer. They are (probably) an employee. Most small homeschool groups don't want to deal with W-2 forms, Social Security taxes, federal and state tax withholding, etc.. But don't think you can avoid the tax filings by just saying she's an independent contractor. The IRS has a 20 factor test to determine independent contractor status. If your homeschool group is like most, your director won't pass the test for independent contractor status. I've written about that in several other articles and on my blog. (Thanks to Becky in Indiana for the question)
[back to top]
Our group has a checking account in the my name and now the bank won't take checks made out to the organization. I don't want checks written to me. What should I do?
You should get an EIN (Employer Identification Number. See below) from the IRS. Then go back to the bank and open a new nonprofit checking account. Most banks offer nonprofit accounts for free. You should not have checks written to you personally. To the bank, it looks as if you are trying to deposit the organization's money into your personal account. That's a big no-no called theft! (thanks to Shireen in California for the question!)
[back to top]
Do we have to have a separate checking account? Can it be a personal account since business accounts cost a lot?
Once a homeschool organization is over ten families they may have expenses like postage, printing, materials, events and even rent. I would then recommend a separate checking account. Sometimes a Treasurer opens a personal checking account to save on bank fees. If she has a personal account for handling the homeschool organization’s business, the cash in it could be seen as her personal income in the eyes of the IRS. I’m sure she doesn’t want that! Most banks offer free checking to non profit organizations.
[back to top]
Does my organization need an Employer Identification Number (EIN)?
Your bank may ask for your organization to get a “Employer Tax Number” (or they many call it a “Tax ID number” or even an “IRS ID number”). It’s officially called an Employer Identification Number (EIN). This number is similar to a Social Security Number for a business or organization. Even though your organization may have no employees and no business with the IRS, you need to get an EIN to open a bank account.
[back to top]
How do we get an EIN?
Go to www.irs.gov and Search for “EIN”.
You can fill in the Form SS-4 on-line and print it out for mailing. Keep a copy for yourself. If you’re in a hurry, you can also apply by telephone, fax or on-line for an EIN and mail in the paperwork later. Tip: Under Type of Entity, check “Other Nonprofit Organization and put “Educational Organization” in the blank. Another tip: Choose your name very carefully! See What’s in a Name
[back to top]
What does 501c3 mean anyway?
501(c)(3) is a section of the US tax code that defines a special type of non-profit organization that is organized for “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.” 501(c)(3) status is important to many charitable groups. Not only does the group avoid paying taxes on income, but the donor may deduct their donations from their income for tax purposes. Some individuals and groups (and virtually all foundations) will not give to a charity if it does not have 501(c)(3) status. Therefore, loss of this status can be harmful to a charity's existence. (From Wikipedia, the free on-line encyclopedia)
[back to top]
A member of our group wants to make a donation. Can she?
Generous donations are always gratefully accepted! But unless your organization is a 501c3 tax exempt non-profit, the donation is not a tax deduction for the donor. Sorry. But that tax deduction for donors is the number one reason that non-profits want 501c3 status.
[back to top]
A business wants to donate some supplies. Can they?
The donation of supplies or equipment is very generous on the part of many businesses. If your organization is a 501c3 tax exempt nonprofit, then the donation is a tax write-off for the business. If your organization does not have 501c3 status, the donation is not tax deductible. Perhaps you could offer to tell everyone in the group about the business’s generous donation and offer “free advertising” in exchange for the donation.
[back to top]
We have some cash leftover at the end of our year. What should we do with it?
A nonprofit can hold leftover cash in their bank account until used in the future. A nonprofit may NOT distribute leftover cash to its members or directors. The leftovers belong to the organization, not to individuals.
[back to top]
What does my state require?
Each state is slightly different in their requirement for filing as a not-for-profit corporation. The state’s goal is to offer nonprofit status to only organizations that have a legitimate charitable purpose. You should begin with a mission statement that briefly describes your purpose, such as “provide support to home schooling families with classes, events and activities”. Then the state will require an established board of directors. Choose at least three people to serve as President, Secretary and Treasurer. Five is usually recommended. The real paperwork comes when you have to write up by-laws. Keep these general and brief. Then you’re ready to call your state office and request a nonprofit incorporation application (it may be found on-line also).
[back to top]
Who do I contact at the State level?
It is the state’s job to incorporate your organization as a not-for-profit organization. This is usually done at the Secretary of State’s (SOS) Office. The SOS Office acts as a big record keeper. They want to know if anyone is doing business out there under an assumed name. That is to protect us as citizens of the state from crooks and thieves. The state also wants to know if a business exists so it can collect taxes! A non-profit organization needs to file with the SOS office as a non-profit corporation, so it won’t get taxed on any surplus it has. The IRS has a list of State sites: http://www.irs.ustreas.gov/charities/article/0,,id=129028,00.html
[back to top]
Do I need to register anywhere else with my State?
Some states want to know if you are soliciting donations, even if you are not a 501c3 and even if you are not a non-profit corporation. They call this Charity Registration. It is usually done through the Attorney General’s (AG) Office. The AG acts like a sheriff on the look-out for crooks. They want to know who is selling stuff as a fundraiser and who is asking for donations.
[back to top]
I’m confused between the State and the IRS’s role. What’s the difference?
It is the federal government’s role to offer what the IRS calls “tax exempt” status. The IRS does not confer “non-profit status” to an organization; that is the role for state government. The IRS only looks at nonprofits to determine if they should be granted the coveted “qualified charity” status. This is coveted because donors can then deduct their gifts on their tax returns and the organization avoids tax on its surplus.
[back to top]
A fund raiser program is only open to 501c3 organizations. Can we participate?
Many fund raising programs are now open only to 501c3 organizations. They set the rules. If you’d like to participate you’ll need to apply for 501c3 status.
[back to top]
Does a non-profit ever pay taxes?
A nonprofit may pay taxes on any “profit” or surplus if they have not been granted tax exempt status by the IRS. They may also owe other taxes such as property tax on a building the nonprofit owns or sales tax when they make purchases. Some states allow nonprofits to be exempt from property tax and sales tax. All nonprofits (even if tax exempt) will owe employer tax (Social security and Medicare) if they hire employees.
[back to top]
We want to hire an employee. What’s involved?
Paperwork! Hiring an employee is a new level of responsibility and takes more record keeping. The organization will need to file quarterly tax filings with the IRS and state departments of taxes (and sometimes City Tax Departments, too!). There are also annual filings of W-2 forms and forms to the IRS and Social Security Administration. Start at the IRS web site for more information. http://www.irs.ustreas.gov/charities/article/0,,id=128716,00.html
[back to top]
We want to hire someone as an Independent Contractor. What’s involved?
Hiring an Independent Contractor is somewhat easier than an employee. There are no quarterly filings required. At the end of the year there is still filing with the IRS and Social Security Administration. See http://www.irs.gov/businesses/small/article/0,,id=99921,00.html for more information.
[back to top]
What’s the difference between employee and Independent Contractor?
The IRS defines Independent Contractor like this: “A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.” Think of a plumber coming into your home to do a specific task. He is an IC, not your employee. An IC brings there own tools, is already trained and usually offers his services to the public. See http://www.irs.gov/taxtopics/tc762.html for more information.
[back to top]
Can we give a discount to volunteers?
Yes. It is very common for a nonprofit to discount fees for volunteers. It needs to be disclosed on the Annual IRS Information Return, Form 990.
[back to top]
A professional wants to donate their time and wants a receipt from us. What do we give him/her?
Donations of time are not tax deductible. Your organization should not give a receipt for the value of their donated time. Only give receipts for donations of goods or cash.
[back to top]
Can a nonprofit make a profit?
Yes, the word nonprofit actually means that no individual makes a profit from the organization, but the organization itself can keep extra earnings. It is assumed that any surplus goes toward future expenses that are in line with the organization’s mission.
[back to top]
Can a nonprofit earn interest?
Yes. Nonprofits may earn interest, have a savings account, own stock and receive dividends. They can even own property and sell it at a profit.
[back to top]
HomeschoolCPA has collected some commonly asked questions about non-profit status and organization from homeschool group leaders. I hope you find them helpful.
I also answer several questions on my HomeschoolCPA blog. Visit my blog to see if your question has been answered there. If not feel free to send me an e-mail.
- Can we pay someone on honorarium for teaching a class at out homeschool co-op? Will it constitute an independent contractor with all the tax implications?
- My homeschool group earns some money as a fund raiser by cleaning up our county fairgrounds. Do we have to pay taxes on this money?
- Can we pay our volunteer director a small stipend? She works so hard.
- Our group has a checking account in my name and now the bank won't take checks made out to the organization. I don't want checks written to me. What should I do?
- Do we have to have a separate checking account? Can it be a personal account since business accounts cost a lot?
- Does my organization need an Employer Identification Number (EIN)?
- How do we get an EIN?
- What does 501c3 mean anyway?
- A member of our group wants to make a donation. Can she?
- A business wants to donate some supplies. Can they?
- We have some cash leftover at the end of our year. What should we do with it?
- What does my state require?
- Who do I contact at the State level?
- Do I need to register anywhere else with my State?
- I’m confused between the State and the IRS’s role. What’s the difference?
- A fund raiser program is only open to 501c3 organizations. Can we participate?
- Does a non-profit ever pay taxes?
- We want to hire an employee. What’s involved?
- We want to hire someone as an Independent Contractor. What’s involved?
- What’s the difference between employee and Independent Contractor?
- Can we give a discount to volunteers?
- A professional wants to donate their time and wants a receipt from us. What do we give him/her?
- Can a non-profit make a profit?
- Can a non-profit earn interest?
If
you have a question that
is not listed here, email me at questions@homeschoolcpa.com.
I’ll try to post the most common questions and answers here
or on
my HomeschoolCPA blog.
If you have a question, then it is likely that others have the same
question. (If you have questions about income tax or small business
accounting, please visit my other website CarolToppCPA.com)
When do we
need to file for
501c3 status?
The IRS allows a small nonprofit organization the benefits of tax exemption without filing the Form 1023 if their annual gross revenue is normally not more than $5,000. (See Instructions for IRS Form 1023, page 1). $5,000 is a pretty small organization; it doesn’t take much to bring in $5,000 a year. Note that the measure is gross revenue, meaning all your revenue, not just your profit. Read this article for more information.
The IRS allows a small nonprofit organization the benefits of tax exemption without filing the Form 1023 if their annual gross revenue is normally not more than $5,000. (See Instructions for IRS Form 1023, page 1). $5,000 is a pretty small organization; it doesn’t take much to bring in $5,000 a year. Note that the measure is gross revenue, meaning all your revenue, not just your profit. Read this article for more information.
Honorariums are considered income to the
recipient. Your
organization will have to give the teacher a form 1099MISC if
you paid him or her $600 or
more
in a year. A copy of the 1099MISC form is also filed with the
IRS. If you pay him or her less than $600, there nothing for
your
organization to report. The recipient is still supposed to
report
the
honorarium income on his or her 1040 tax return as Misc Income. (Thanks
to Tawnya in SD for the question)
My homeschool group earns some money as a fund raiser by cleaning up our county fairgrounds. Do we have to pay taxes on this money?
Normally income earned from an activity unrelated to your mission is called Unrelated Business Income and subject to income tax by the IRS. Cleaning up the fairgrounds is not related to your mission of providing services to homeschooling families, so it is an unrelated business income. But the good news is that the IRS will allow this income to be tax exempt if the work is preformed by volunteers. You told me that your homeschool group families are all volunteers-no one is paid. So you do not have to pay taxes on this income.
[back to top]
Can we pay our volunteer director a small stipend? She works so hard.
I'm sure she does work hard and deserves some show of your appreciation, but volunteers are not paid. As soon as they are paid they are not a volunteer. They are (probably) an employee. Most small homeschool groups don't want to deal with W-2 forms, Social Security taxes, federal and state tax withholding, etc.. But don't think you can avoid the tax filings by just saying she's an independent contractor. The IRS has a 20 factor test to determine independent contractor status. If your homeschool group is like most, your director won't pass the test for independent contractor status. I've written about that in several other articles and on my blog. (Thanks to Becky in Indiana for the question)
[back to top]
Our group has a checking account in the my name and now the bank won't take checks made out to the organization. I don't want checks written to me. What should I do?
You should get an EIN (Employer Identification Number. See below) from the IRS. Then go back to the bank and open a new nonprofit checking account. Most banks offer nonprofit accounts for free. You should not have checks written to you personally. To the bank, it looks as if you are trying to deposit the organization's money into your personal account. That's a big no-no called theft! (thanks to Shireen in California for the question!)
[back to top]
Do we have to have a separate checking account? Can it be a personal account since business accounts cost a lot?
Once a homeschool organization is over ten families they may have expenses like postage, printing, materials, events and even rent. I would then recommend a separate checking account. Sometimes a Treasurer opens a personal checking account to save on bank fees. If she has a personal account for handling the homeschool organization’s business, the cash in it could be seen as her personal income in the eyes of the IRS. I’m sure she doesn’t want that! Most banks offer free checking to non profit organizations.
[back to top]
Does my organization need an Employer Identification Number (EIN)?
Your bank may ask for your organization to get a “Employer Tax Number” (or they many call it a “Tax ID number” or even an “IRS ID number”). It’s officially called an Employer Identification Number (EIN). This number is similar to a Social Security Number for a business or organization. Even though your organization may have no employees and no business with the IRS, you need to get an EIN to open a bank account.
[back to top]
How do we get an EIN?
Go to www.irs.gov and Search for “EIN”.
You can fill in the Form SS-4 on-line and print it out for mailing. Keep a copy for yourself. If you’re in a hurry, you can also apply by telephone, fax or on-line for an EIN and mail in the paperwork later. Tip: Under Type of Entity, check “Other Nonprofit Organization and put “Educational Organization” in the blank. Another tip: Choose your name very carefully! See What’s in a Name
[back to top]
What does 501c3 mean anyway?
501(c)(3) is a section of the US tax code that defines a special type of non-profit organization that is organized for “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.” 501(c)(3) status is important to many charitable groups. Not only does the group avoid paying taxes on income, but the donor may deduct their donations from their income for tax purposes. Some individuals and groups (and virtually all foundations) will not give to a charity if it does not have 501(c)(3) status. Therefore, loss of this status can be harmful to a charity's existence. (From Wikipedia, the free on-line encyclopedia)
[back to top]
A member of our group wants to make a donation. Can she?
Generous donations are always gratefully accepted! But unless your organization is a 501c3 tax exempt non-profit, the donation is not a tax deduction for the donor. Sorry. But that tax deduction for donors is the number one reason that non-profits want 501c3 status.
[back to top]
A business wants to donate some supplies. Can they?
The donation of supplies or equipment is very generous on the part of many businesses. If your organization is a 501c3 tax exempt nonprofit, then the donation is a tax write-off for the business. If your organization does not have 501c3 status, the donation is not tax deductible. Perhaps you could offer to tell everyone in the group about the business’s generous donation and offer “free advertising” in exchange for the donation.
[back to top]
We have some cash leftover at the end of our year. What should we do with it?
A nonprofit can hold leftover cash in their bank account until used in the future. A nonprofit may NOT distribute leftover cash to its members or directors. The leftovers belong to the organization, not to individuals.
[back to top]
What does my state require?
Each state is slightly different in their requirement for filing as a not-for-profit corporation. The state’s goal is to offer nonprofit status to only organizations that have a legitimate charitable purpose. You should begin with a mission statement that briefly describes your purpose, such as “provide support to home schooling families with classes, events and activities”. Then the state will require an established board of directors. Choose at least three people to serve as President, Secretary and Treasurer. Five is usually recommended. The real paperwork comes when you have to write up by-laws. Keep these general and brief. Then you’re ready to call your state office and request a nonprofit incorporation application (it may be found on-line also).
[back to top]
Who do I contact at the State level?
It is the state’s job to incorporate your organization as a not-for-profit organization. This is usually done at the Secretary of State’s (SOS) Office. The SOS Office acts as a big record keeper. They want to know if anyone is doing business out there under an assumed name. That is to protect us as citizens of the state from crooks and thieves. The state also wants to know if a business exists so it can collect taxes! A non-profit organization needs to file with the SOS office as a non-profit corporation, so it won’t get taxed on any surplus it has. The IRS has a list of State sites: http://www.irs.ustreas.gov/charities/article/0,,id=129028,00.html
[back to top]
Do I need to register anywhere else with my State?
Some states want to know if you are soliciting donations, even if you are not a 501c3 and even if you are not a non-profit corporation. They call this Charity Registration. It is usually done through the Attorney General’s (AG) Office. The AG acts like a sheriff on the look-out for crooks. They want to know who is selling stuff as a fundraiser and who is asking for donations.
[back to top]
I’m confused between the State and the IRS’s role. What’s the difference?
It is the federal government’s role to offer what the IRS calls “tax exempt” status. The IRS does not confer “non-profit status” to an organization; that is the role for state government. The IRS only looks at nonprofits to determine if they should be granted the coveted “qualified charity” status. This is coveted because donors can then deduct their gifts on their tax returns and the organization avoids tax on its surplus.
[back to top]
A fund raiser program is only open to 501c3 organizations. Can we participate?
Many fund raising programs are now open only to 501c3 organizations. They set the rules. If you’d like to participate you’ll need to apply for 501c3 status.
[back to top]
Does a non-profit ever pay taxes?
A nonprofit may pay taxes on any “profit” or surplus if they have not been granted tax exempt status by the IRS. They may also owe other taxes such as property tax on a building the nonprofit owns or sales tax when they make purchases. Some states allow nonprofits to be exempt from property tax and sales tax. All nonprofits (even if tax exempt) will owe employer tax (Social security and Medicare) if they hire employees.
[back to top]
We want to hire an employee. What’s involved?
Paperwork! Hiring an employee is a new level of responsibility and takes more record keeping. The organization will need to file quarterly tax filings with the IRS and state departments of taxes (and sometimes City Tax Departments, too!). There are also annual filings of W-2 forms and forms to the IRS and Social Security Administration. Start at the IRS web site for more information. http://www.irs.ustreas.gov/charities/article/0,,id=128716,00.html
[back to top]
We want to hire someone as an Independent Contractor. What’s involved?
Hiring an Independent Contractor is somewhat easier than an employee. There are no quarterly filings required. At the end of the year there is still filing with the IRS and Social Security Administration. See http://www.irs.gov/businesses/small/article/0,,id=99921,00.html for more information.
[back to top]
What’s the difference between employee and Independent Contractor?
The IRS defines Independent Contractor like this: “A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.” Think of a plumber coming into your home to do a specific task. He is an IC, not your employee. An IC brings there own tools, is already trained and usually offers his services to the public. See http://www.irs.gov/taxtopics/tc762.html for more information.
[back to top]
Can we give a discount to volunteers?
Yes. It is very common for a nonprofit to discount fees for volunteers. It needs to be disclosed on the Annual IRS Information Return, Form 990.
[back to top]
A professional wants to donate their time and wants a receipt from us. What do we give him/her?
Donations of time are not tax deductible. Your organization should not give a receipt for the value of their donated time. Only give receipts for donations of goods or cash.
[back to top]
Can a nonprofit make a profit?
Yes, the word nonprofit actually means that no individual makes a profit from the organization, but the organization itself can keep extra earnings. It is assumed that any surplus goes toward future expenses that are in line with the organization’s mission.
[back to top]
Can a nonprofit earn interest?
Yes. Nonprofits may earn interest, have a savings account, own stock and receive dividends. They can even own property and sell it at a profit.
[back to top]