The 2020-2021 school year is expected to be almost fully virtual for many students. To help students thrive in these trying times, many parents form small study groups to help supervise and educate their children, while limiting social contact and the spread of infection. These study groups are commonly referred to as “Pandemic School Pods.” Our tax and accounting practice, Make My Day CPA, has been receiving numerous questions from clients which we want to share with you to help you on this journey.
Do we need to form a legal entity for our Pod?
You should not need to form a legal entity; however, it is recommended to check with an attorney to see how your pod design and operations may affect a need for a legal entity. Any individual (or a group of individuals) can engage tutors and supervisors and purchase educational resources directly. Best practices show a written, signed agreement documenting the rights and responsibilities of each parent and service provider will go a long way should a dispute arise.
Who is reporting income and paying taxes?
The tutor/supervisor receives payments directly from each parent. If these payments represent independent contractor income, then the tutor/supervisor will report income and expenses on Schedule C of IRS Form 1040 U.S. Individual Tax Return. The tutor/supervisor is also expected to file a state income tax return based on where that income was received and is responsible for reporting all income to the tax agencies regardless of whether the parents provided them an IRS Form 1099.
Is a tutor considered an independent contractor or a household employee?
This depends on how the relationship is established and what the state’s definition of self-employment is. If the tutor operates under direct supervision of parents, they may be considered a household employee, and parents would be required to report their payments to the tutor on Schedule H on IRS Form 1040 U.S. Individual Tax Return in order to pay the employment taxes. If the tutor is autonomous, making financial and behavioral decisions themselves, payment would be considered self-employment income. Parents have the legal right to determine the details of how the educational services will be performed and are advised to check with the state or residence as to the local definition of self-employment income. It would also be wise for a tutor or a supervisor to register with the state as a Sole Proprietor doing business in that state.
What if I hire a minor to supervise other kids during the day?
Any individual is responsible for timely reporting and filing of a tax return regardless of their age. Generally, payments in excess of $1,000 a quarter and $2100 a year will have to be reported on the Schedule H of the form 1040. Each parent is encouraged to discuss their specific facts and circumstances with a CPA.
What is the parents’ tax responsibility?
Parents are responsible for collecting an IRS Form W-9 Request for Taxpayer Identification Number and Certification filled out and signed by a tutor and are encouraged to do so before they make the first payment to that tutor. They are expected to report payments to the tutor in excess of $600 on the IRS Form 1099 which must be submitted to the Internal Revenue Service by mail or electronically no later than January 31st of the following year. Each parent is responsible for reporting his or her share of payments made to the tutor.
Are there any expenses that parents could deduct on their tax returns?
No. Currently, the education expenses incurred related to the pod operation, including payments made to tutors or supervisors, are not considered deductible expenses.
Are there any expenses in providing services to pods that tutors could deduct on their tax returns?
Yes. Expenses related to the educational activity could potentially be deductible. It’s important to know how to track these expenses because the following expenses may become deductible:
- Supplies and educational materials
- Computer hardware and software
- Communications, especially cell phone and internet service, either partially or completely
- Subscriptions and continued education
- Home office
- Accounting software
- Tax planning and filing
Could parents use retirement and educational savings to fund the parents’ pods schooling fees?
Coverdell accounts have been designed to be used for children’s education throughout the school years and beyond, and are thus not taxable if funds are used for education. Education expenses would include the fees paid to tutors and money used for education supplies, software, and equipment. Based on 2017 Tax Cuts and Jobs Act, parents can withdraw money from their children’s 529 College plans to pay for K-12 educational expenses as well.
In addition, if your family income is affected by COVID, the CARES Act allows for penalty-free withdrawals from a participant’s 401k vested balance of up to $100,000. If your retirement plan allows loans up to $50,000, the government relief allows an increase in the loan limit up to $100,000. The 50% vested balance limit may be increased to 100% through September 22, 2020 with distributions allowed through December 30, 2020, and these can be repaid by the Employee within three years of that distribution. The amount of the distribution is still taxable, but the taxation can also be spread over a period of three years.
Are tutors responsible for bookkeeping?
Yes. At the end of the year, the tutors will have to report their income on Schedule C of their personal tax return the same way business activity is reported. Regular bookkeeping is necessary in order to calculate the taxable income and justify expenses reported as deductions against income on the tax return. Since the volume of transactions is limited, there are plenty of options that range from free online software to a low-cost software package, and we recommend Xero and Wave accounting platforms.
You are not alone! Millions of parents are finding that Pandemic School Pods offer alternative education and socialization opportunities for children during these difficult pandemic times. Our accounting staff is here to guide you through the process. We will continue to update our Q&A section as new questions arise, so stay tuned and visit our website and Facebook pages for more information. You could schedule our $45 consultation by clicking here and choosing Book Now.