There were a lot of changes to the US taxes in 2018 and the IRS re-designed the Form 1040, so tax preparation in 2019 will be very confusing.

Here are some highlights of the tax law changes that affect homeschool business owners and that includes (nonemployee) teachers at a homeschool co-op, owners of for-profit homeschool programs, and tutors.

Yes, teacher and tutors are business owners! If you accept payment and offer a service (like a class), you are in business and are a business owner. If you teach or tutor as an Independent Contractor, you have a tutoring business!

Highlights of Tax Changes in 2018

•  No more exemptions for each family member. This may hurt large families.
•  Standard deduction increased to $12,000 S/$24,000 MFJ
•  Child Tax credit increased to $2,000/child
•  New Qualified Business Income deduction
•  New tax forms: 1040 “postcard”
•  Lower tax rates (12% for most of us)

The new Qualified Business Income deduction will help homeschool business owners. You’re going to love it!

The deduction is equal to 20% of your profit from a “qualified” business (sole prop, partnerships, S corp)

If your Taxable Income less than $157,000 Single or $315,000 Married Filing Joint, your business is “qualified.”

Look for this Qualified Business Income deduction on new re-designed Form 1040 Line 9

There is a lot to learn about running a business. I don’t mean to discourage you or anyone else away from operating a homeschool business. You provide a valuable service to homeschool families! I am offering this webinar to help you understand the tax implications:

I recorded a webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to tutors, non-employee co-op teachers and other homeschool business owners! You can watch the recording at HomeschoolCPA.com/HSBIZTAXES for a small fee of $10.

Carol, thank you again for the webinar. It was one of the BEST webinars I’ve EVER attended. If you do hold another one, I would pay for it hands down.  Totally worth the $10!“ -Denise, webinar attendee

“I actually don’t care for webinars at all – it is not my learning style at all and I struggle to focus, but this one was extremely value and had my attention”. -Mary, webinar attendee

I hope that helps,

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders

I’ve talked to a lot of homeschool (for-profit) program directors over the past few years. These people have a huge heart for homeschooling, but many do not understand that when they start their programs, they began operating a business. They don’t see themselves as business owners (but they are!), and so they neglect getting educated about running a business and make a lot of mistakes.

Here are the top tax mistakes I see homeschool for-profit directors make:

1. Giving themselves a 1099-MISC.
2. Not understand that they are business owners.
3. Paying tutors as Independent Contractors but treat them as employees.
4. Not understanding their tax obligations.
5. Not being prepared for self-employment tax.
6. Not being aware of potential penalties for worker misclassification.
7. Not keeping good records.
8. Not seeking professional advice before signing an agreement or launching a program.
9. Not getting tax advice.
10. Asking Independent Contractors or employees to volunteer their time. That is Illegal in most states.
11. Not realizing fundraisers are taxable income.
12. Thinking they can form a nonprofit by filing a piece of paper but not forming a board or drafting bylaws.

I explain a lot of these tax mistakes in my webinar on Tax Preparation for Homeschool Business Owners. It should be a lot of help to for-profit directors, tutors, co-op teachers and other homeschool business owners! For details visit HomeschoolCPA.com/HSBIZTAXES

Additionally my book on  Paying Workers in a Homeschool Organization  explains in detail why tutors should be paid as employees and the risk a homeschool business owner is taking if she pays her teachers or tutors as Independent Contractors.

I’m not trying to scare anyone!  Sorry if I did, but maybe it will compel you to change your actions.

I’m not trying to talk you out of being a homeschool business owner, director of a for-profit program, or tutor if you love it.

But I am trying to help you stay out of trouble with the IRS and your state government.

The last thing I want is an audit of homeschool programs or businesses by the IRS or state governments! No one wants the reputation of homeschooling tainted in the eyes of our government. We don’t need that!

Carol Topp, CPA

HomeschoolCPA.com

Helping homeschool leaders

Every year the IRS Tax Exempt division releases a list of areas and issues they plan to focus on for audits and investigations. The IRS Tax Exempt division calls it their Program Letter. The Exempt Division is the branch of the IRS that grants 501c tax exempt status to nonprofit organizations.

The Charity Law blog discussed the IRS Tax Exempt work plan for 2019.

I found the list of things the IRS considers “the highest known priority and emerging risks” to be interesting, especially these two issues that affect homeschool programs, both nonprofit and for-profit:

• Previous for-profit: focus on organizations formerly operated as for-profit entities prior to their conversion to IRC Section 501(c)(3) organizations.
• Worker classification (misclassified workers): determine whether misclassified workers result in incorrectly treating employees as independent contractors.

So if you are converting a for-profit homeschool business to a nonprofit organization, be prepared for some extra questioning and scrutiny from the IRS. You’ll have to file the longer Form 1023 to apply for 501c3 tax exempt status and explain in your Narrative why you are converting to nonprofit status. You will not be eligible for using the shorter IRS Form 1023-EZ.

My book, The IRS and Your Homeschool Organization  explains how to apply for 501c3 tax exempt status.

Additionally, if you are treating your homeschool program teachers or tutors as Independent Contractors, be prepared for the IRS to keep an eye on you and they may open an investigation into your worker classification.

My book Paying Workers in a Homeschool Organization will be a big help to you in paying workers.

Additionally, the IRS is hiring approximately 40 new revenue agents to process determination applications. Is that good news? More IRS revenue agents should mean both faster processing and increased audits and investigations! Both good and bad, in my opinion.

Carol Topp, CPA

HomeschoolCPA.com

Lots of homeschool groups hire and pay teachers to conduct classes. Sometimes these teachers are homeschool parents, but sometimes they are professional instructors. Homeschool leaders have a lot of questions about paying teachers and other workers.

Topics in this episode include:

• Independent Contractor or employee
• The factors the IRS considers in classifying workers
• What if parents pay teachers directly?
• How paying teachers affects your church host
• Can Independent Contractors receive tuition discounts

This is the fourth part of a 5-part series on Top 10 Tips for Homeschool Leaders, a workshop given to homeschool leaders in Wichita, Kansas.

Each episode can be found at HomeschoolCPA.com/Podcast. In the 5-part podcast series Carol will cover:
Episode # 180 Board duties
Episode # 181 Bylaws
Episode # 182 Preventing fraud
Episode # 183 Paying Workers
Episode # 184 Insurance and Record keeping

Featured Resource:

Paying Workers in a Homeschool Organization
Are you paying workers in your homeschool organization?

• Can a volunteer be paid?
• Should a worker be treated as an employee or independent contractor?
• Do you know the difference?

Homeschool leader and CPA, Carol Topp, has the answers to your questions in her book Paying Workers in a Homeschool Organization.
This 130 page book covers paying workers as employees or independent contractors. There are also chapters on paying volunteers and board members. It includes sample forms, tips and advice to help you pay workers in accordance with the IRS laws to help your organization pay their workers correctly. Written specifically for homeschool organizations.

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California’s new law (AB5) puts into affect the 2018 ruling by the California Supreme Court in the Dynamex case that makes it more difficult to treat workers as Independent Contractors. The new law uses an ABC test introduced in the Dynamex case. It’s a simple 3-part test that makes it more difficult to legally pay workers as Independent Contractors.

I recorded a podcast episode about the ABC test when it first came out. ABC Test for Independent Contractors (podcast episode)

How does this affect homeschool groups?

• If your homeschool group is a nonprofit organization, these employment laws apply to your organization. Your nonprofit status (with or without 501c3 tax exempt status) does not exempt your organization from obeying the employment laws of the IRS and your state.
• If you’re in a homeschool business, such as a CC Community, then you are affected by this ruling, especially if you live in California.
• If you are an all-volunteer homeschool program (no one is paid), then this law does not affect you.

I’m a homeschool group leader. What do I need to do?

If you live in California, convert your teachers/tutors to employees starting January 1, 2020.

If you live in another state, strongly consider having me (or another qualified CPA) do a worker determination. There may be changes you can make to your homeschool program that are simple and inexpensive.

Will this spread to other states? What about the IRS?

Probably. I predict within 5 years, most states will adopt something like the California ABC test for Independent Contractor status.

So far the IRS is not using the ABC test, but they use similar criteria that causes me to conclude teachers in a homeschool program should be treated as employees not Independent Contractors. Read my reasons.

Which law do I follow? State or Federal/IRS?

I talked to a CPA about this a few years ago and he said we’re fine

or

My CC SR or AR said I’m OK treating my tutors as ICs; their lawyers know about the situation.

A worker determination should be in writing on the letter head of either a CPA, Enrolled Agent or attorney. Only those three professions are allowed to practice before the IRS. This determination, in writing and on the letterhead of the professional, may help abate any penalties for misclassifying workers if the IRS or your state audits you.

Do not rely on verbal statements. Do not reply on verbal statements made by CPAs, EAs or attorneys. Get it in writing. Do not reply on verbal statements made by non-CPAs, non-EAs or non-attorneys, no matter how reassuring they are that they have talked with a professional. Get an opinion specific to your organization in writing.

Ask for a statement in writing addressed to your particular business/nonprofit from a qualified professional who has assessed your situation in particular.

What if the parents pay the teachers directly?

or

My CC tutors are now sublicensees, not my Independent Contractors; I’ve been told that is OK.

The fact that you (as the homeschool group or homeschool business owners) do not pay the worker does seem to avoid the worker classification issue, but it introduces at least two other issues:

1. You cannot control, supervise or direct that worker. They are their own business owner and you have no opportunity to oversee their methods or their performance. You cannot direct them; you cannot supervise them. Do you really want that? Would your parents accept this? You’re working with children, don’t you need to supervise and direct the people teaching the children?
2. If you host your program at a church or other property-tax exempt facility (like a library), then the teacher/sublicensee tutor is conducting his or her business on church property. Does your church host know this? They may have a policy against conducting business on their property because it threatens their property tax exemption. Please refer to my Property Tax FAQ page for more information.

How can I learn more about paying workers?

My book will help

Paying Workers in a Homeschool Organization

• Have a payroll consultation with Mary Musick, CPA (inactive) and current homeschool mom. Mary runs a bookkeeping service and will discuss payroll with you. It may not be as awful as you fear since you are probably hiring part-time, seasonal employees with no benefits. Her email is hfbkkpg@gmail.com.
• Or have a payroll consultation with Jamie Buckland, The Classical Homeschool Consultant. Jamie runs payroll herself for her homeschool classical academy. She can do research on what your state payroll taxes are and reassure that if she can do it, you can do it! Jamie’s website is https://jamiebuckland.net/

Carol Topp, CPA

Hello Carol,

I am the Executive Director of a 501(c)3 non-profit homeschool co-op. We have always had all parents pay teachers directly for classes. Of course the number of checks written by members each semester,and unraveling the missing/lost checks each semester along with the myriad of other payment mysteries has prompted to us to wonder if we can have all parents submit the teacher payments to our group, then we cut a check to each teacher.

We would essentially gather all the money and then direct it to each teacher. One check from each parent for all their children’s classes, and one check to each teacher for all the classes they are teaching.

Can we do this?

Holly

Holly,

Thank you for contacting me.

Yes, you can collect all the payments from parents and then pay the teachers. This is how many homeschool groups, private schools, and college operate. But there are some things to warn you about:

1. Managing more money means you need good accounting software (links to some of my blog posts with software recommendations), one that can invoice parents and track who has paid and who still owes.

2. Additionally, since you have a lot more income, you may have crossed an IRS threshold and now need to be filing the annual Form 990 or 990-EZ (YouTube video explaining which form you need to file).

3. Worker classification. You need to determine if the teachers are employees or  Independent Contractors (opens a blog post series on worker status). This is not an easy determination to make. You need to consider many factors.

I also offer phone consultations to help you determine if your homeschool organization’s workers are employees or independent contractors. The phone call will be followed up with an email containing a fact-based determination and information to help you take the next steps. Worker Classification consultation.

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Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

I subscribe to a lot of e-newsletters and a really good one is Free Church Accounting. Vicki Boatright has helpful bookkeeping advice for churches and nonprofits like homeschool groups!

Her latest article is about classifying workers as employees or Independent Contractors (IC) and the changes at the federal level (Department of Labor) made by the Biden administration in 2021.

https://www.freechurchaccounting.com/misclassification-of-workers.html

Here’s some highlights of what she says:

“The Biden administration expressed their desire to “pattern” the federal standard for classifying ICs closer to CA’s ABC Test. So earlier this year, the U.S. Department of Labor stopped Trump administration rules that utilized a five-part test for classifying worker and would have made it easier to identify and properly classify workers as ICs and started classifying ICs under the ABC Test.”

“So how will this affect you? Well, unless your musician, custodian, or nursery worker owns their own business and does a similar “job” for other business and organizations, you should be paying them as employees.” (my emphasis added)

https://www.freechurchaccounting.com/misclassification-of-workers.html

She goes onto give some helpful tips for classifying common workers in a church like nursery caregivers, custodians, musicians, etc. Then she really gets serious and mentions the severe criminal and civil penalties for misclassifying your workers as Independent Contractors.

This is serious and scary stuff!

She ends with this warning:

“Remember, a blaring red flag for the IRS is an individual who receives one 1099 from the same organization every year!”

https://www.freechurchaccounting.com/misclassification-of-workers.html

She sounds little bit like me, doesn’t she? I’ve been warning homeschool leaders for years that most teachers in a homeschool organization should be paid as employees because:

1. The homeschool group controls the teacher (you have to control the teachers for the safety of the children) and
2. The teachers provide the key activity of your organization.

Read her whole article. It’s worth the time.

Then read my book Paying Workers in a Homeschool Organization.

And these blog posts: https://homeschoolcpa.com/why-i-think-most-homeschool-teachers-should-be-paid-an-employees/

https://homeschoolcpa.com/what-are-the-consequences-of-misclassifying-a-worker/

https://homeschoolcpa.com/californias-new-abc-test-for-independent-contractors-how-will-it-affect-homeschool-groups/

And finally read about the IRS amnesty program if you’ve been paying teachers as ICs: https://homeschoolcpa.com/irs-amnesty-program-for-employers-how-to-avoid-penalties-for-paying-workers-as-independent-contractors/

Happy New year! (Ugh!)

Carol Topp, CPA
HomeschoolCPA.com
Helping Homeschool Leaders

I am the leader of a support group with around 65 families.  Our group has a board and bylaws.  We also have a co-op of about half the members of the larger group.  The co-op requires members to be a member of the larger group.  The co-op has separate leadership and it’s own checking account. The bylaws don’t address the co-op specifically.

The co-op pays the leadership and teachers from their account.  Tuition and fees are charged for participating families.  Teachers are written checks from the co-op’s account monthly. “Teacher Gift” is always written in the memo in the checks. For the most part, curriculum for the classes are decided upon by the leadership of the co-op. Those in the leadership of the co-op serve no other volunteer function in the main group (their leadership on the co-op has been counted as their volunteer service for all the 7 years the co-op has existed ). Another member of the group has complained that their paid leadership service is not volunteer service and should not be counted toward the main group.  I do agree with this.  But it seems that we need to address this and some other issues that aren’t quite right.

Should our groups separate?  The larger group has not reviewed the co-op’s financial records. The co-op only gave out 1099’s last year for the first time.  I know that whatever is done, there will be hurt feelings and I am at a loss to know where and how to tackle these issues.  Where and what should I start with?

Thanks in advance.

Tina

Tina,
Here’s my advice. Read my book Paying Workers in a Homeschool Organizations.

Good for the co-op for finally giving 1099-NECs to the teachers!  But they should stop writing “Teacher Gift” in the memo. These are not gifts. They are payments for services. Additionally, teachers should be paid as employees, not Independent Contractors.

It is very untypical for homeschool co-op leaders to be paid. Paying board members in a nonprofit organization is not typical and not recommended. It creates a conflict of interest and compromises the duty of loyalty the board should have to the group over their own interests.

Since the co-op is paying their board members, they are employees, not Independent Contractors. Employees require quite a bit more paperwork and may involve paying unemployment tax and workers compensation taxes. I discuss paying board members (don’t do it!), and the difference between independent contractors and employees in the Paying Workers book.

You also said: “Another member of the group has complained that their paid leadership service is not volunteer service and should not be counted toward the main group. I do agree with this. But it seems that we need to address this and some other issues that aren’t quite right.”
You are correct that you cannot pay a volunteer, so perhaps the volunteer service is not fulfilled because the leaders are paid.

You asked: “Should our groups separate? The larger group has not reviewed the co-op’s financial records.” Obviously the larger support group has neglected some of their responsibilities of oversight of the co-op. See my blog post on leader responsibilities

Perhaps it is time to weigh the pros and cons of being separate groups. A lot goes into that decision.

If you wish to discuss your group’s issues and concerns, I recommend a consultation with one of HomeschoolCPA’s Recommended Consultants. These consultants are all homeschool leaders themselves.

I hope that helps.

Carol Topp, CPA
HomeschoolCPA.com

Helping homeschool leaders
————

Hi,

I wanted to thank you so much for writing back and give a little update.  The officers met and decided to work at correcting any errors we may be making.  We have a meeting scheduled with the co-op directors in the next couple of weeks.  I think it is so important to set a good example in everything you do.

Once we get all the information on the finances, then we can make the necessary decisions about our groups.  I am praying for a smooth road.

Your website is very helpful and I have shared it with all the officers of our group.   We are so very appreciative.

Tina