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Nonprofit Law/Independent Contractor For Homeschool Co-op

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QUESTION: I am a part of group of homeschooling families that is in the planning phrases of starting a Home School co-op, where our children will participate in educational enrichment activities facilitated by the parents who will volunteer and receive no pay and in tutorial classes taught by independent contractors (e.g. art teacher and foreign language teachers) who will set their fees and receive payment directly from the parents for each child. Our co-op group will be meeting once a week at a local Church (where we will be leasing space) and will not be for profit. To pay for the use of the Church facility and the expenses related to running the co-op, we plan: 1) to charge per session a co-op fee that each family (that registers) will have to pay; and 2) to charge each independent contractor either a fee of 10% of the contractor's per child per class rate or a flat fee to be determined by the co-op. Our intention is for our Home School Co-op to be a nonprofit group whose annual gross income will not exceed $5,000. We do not want to file an application to get 501(c)(3) status. My questions are: 1) Is it okay for our Home School Co-op as a not for profit to charge an independent contractor a 10% fee, or a flat fee, as described above?; and 2) Will our Home School Co-op have to pay any taxes on the income  generated from either of the fees for independent contractors described above? Thank you for your consideration of this question.

ANSWER: I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. Even though you don't want to file an application to request from the IRS a determination letter that your organization is exempt as a 501(c)(3) organization, if you don't want the IRS to treat your organization as a regular, for-profit entity, you would need to organize and operate as a 501(c)(3) organization should.  The general rules are found in IRS Publication 557 "Tax Exempt Status for Your Organization"
available at:
http://www.irs.gov/pub/irs-pdf/p557.pdf

To operate as a 501(c)(3) organization should, you would not have any substantial activities that are not charitable, educational or religious.  Your activity of charging independent contractor's a 10% fee or flat fee appears not to be an educational activity of the organization but an activity to obtain funds.  

IRS Publication 598 "Tax on Unrelated Business Income of Exempt
Organizations" at
http://www.irs.gov/pub/irs-pdf/p598.pdf
explains that,  if products or services are not directly related to
the charitable, educational, religious or other purpose or function
constituting the basis for its exemption (other than for production
of income), then the activities are generally taxable.

Their exact wording is found in the middle column of page 3
"Unrelated business income is the income from a
trade or business that is regularly carried on by
an exempt organization and that is not substan-
tially related to the performance by the organiza-
tion of its exempt purpose or function, except
that the organization uses the profits derived
from this activity."

The IRS has declared, "Nonprofit organizations that are granted
Federal tax exemption based on their mission-related purposes
are allowed by the IRS, within certain limits, to generate income
from unrelated business activities."
http://www.irs.gov/pub/irs-soi/97eounrl.pdf on pdf page 1. But, the
organization could, if it has more unrelated activities than
the IRS's vague "certain limit", be jeopardizing its exemption
depending upon the facts and circumstances. Two of the main factors
is the gross income of the activity in relation to the gross income
of the organization's total income and staff time spent on the
activity. Court cases reveal that 5% is probably safe, whereas 20%
or more can jeopardize exempt status.

From what you wrote, I do not know what percentage would be from the independent contractors  I would be willing to work on your matter further, but I would need to spend a substantial amount of time in analyzing your proposed budget and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    



---------- FOLLOW-UP ----------

QUESTION: Thank you for response. In light of your response, I have a follow-up question. In addition to the proposed independent contractor fee, our homeschool co-op will be charging each co-op family a $40 co-op fee which will cover the children's participation in the enrichment educational classes and activities and a registration fee that is a per family fee to cover the cost of operating the group, that is, to pay for group liability insurance & background checks required by our host church for us to operate on their premises. My questions are: 1) Is it okay for our Home School Co-op as a not for profit to charge a co-op fee, and registration fee, as described above?; and 2) Will our Home School Co-op have to pay any taxes on the income  generated from either of the co-op fee or the registration fee? Thank you for your consideration of this follow-up question.

ANSWER: 1. An educational organization may charge fees like tuition and you can call that a "co-op" fee. 2. If your organization is granted 501(c)(3) organization approval then you would not be paying federal income taxes on the tuition you receive.

The main issue with the IRS is whether your organization has been set up to benefit only a few families (private) and not public).  See
http://www.irs.gov/pub/irs-lafa/den1646r.pdf on page 6

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    


---------- FOLLOW-UP ----------

QUESTION: Thank you again for responding, and so quickly. You indicated in your response that the  co-op fee would not be taxable. What about the registration fee that will be charging to cover the cost of our group liability insurance and background checks? Will have to pay Federal taxes on the registration fee?

Answer
The first issue is whether the organization will be considered by the IRS as primarily educational.  If it is then the normal income items would not be taxable.  I am not going to be going over every item of a budget.  I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations.  But I will inform you that the IRS rule for what nonprofits may spend money on is similar to the standard that the IRS uses when determining what is a valid business expense for an ordinary business us that is aA necessary expense is one that is helpful and appropriate for your trade or busi-
ness. An expense does not have to be indispensable to be considered necessary.
http://www.irs.gov/pub/irs-pdf/p535.pdf "Business Expenses"
on page 3.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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