FARMHOUSE
QUESTIONS OF THE WEEK
(From recent Inside FH newsletters)
Taxes / Finances
- "One of our brothers will be spending the summer doing recruitment for the house. We're trying to figure out what we need do as far as taxes and stuff since he'll be getting paid?"
- "We're having trouble with a supply company sending us cases of chemicals and billing us for them, even though we didn't order them. What should we do?"
- "Since we're a non-profit, what are the rules about us being tax exempt?"
- "We just got a letter from IRS saying that we need to submit a 990 and that we may owe some money. I thought we were a non-profit and didn't have to pay taxes. What is this 990?"
- "We received a 1099 form from our bank, where we currently hold a savings/money market account. What do we need to do to file this? We haven't received one before."
QUESTION OF THE WEEK? --- One of our brothers will be spending the summer doing recruitment for the house. We're trying to figure out what we need do as far as taxes and stuff since he'll be getting paid?
It's often overlooked by chapters, but when you pay a summer recruitment chair for his work over the summer, he's an employee of the chapter and as such, his employment needs to be handled in much the same way as for your paid cook or housemother. That includes working with an accounting firm to handle W-2s, withholdings and tax details as well as ensuring that worker's compensation coverage has been secured in case of injury while on the "job."
The issue of chapter officers who are receiving a salary or stipend is a tricky one - mainly because employment laws vary from state to state. Some chapters and associations have looked at setting up the position as one in which the individual would be receiving a scholarship for the summer of work. However, most likely the IRS would see that as self-serving, and that the organization is receiving something in exchange for the scholarship. Almost undoubtedly they'd view such as an arrangement as a employer-employee arrangement that should be taxable. If Foundation funds were used for such a scholarship, they'd likely throw up a red flag and question it. Our best advice is discuss this with your insurance broker/carrier who will be providing coverage.
* For reference sake, please see the attached new Worker's Compensation Insurance and Property Insurance Policy that the FarmHouse International Board approved at its Spring Meeting last weekend. The policy requires each chapter/association to provide proof of worker's compensation coverage for all employees and proof of property insurance annually.
This policy was established in part because of what has become nearly a $40,000 payout that FRMT has incurred because of a recent claim involving a FarmHouse Chapter whose cook/housemother fell on ice after attending a meeting at another fraternity chapter house. The chapter had a written employment agreement with her stating that worker's compensation coverage would be provided, however when the accident occurred, the chapter realized it actually didn't have a worker's comp coverage in place. In turn, FRMT was held liable for the negligence of the chapter.
Please help ensure that your association board and chapter exec board read this policy and make sure that adequate coverage is in place. - JG
BACK TO TOP MENU
QUESTION OF THE WEEK? --- We're having trouble with a supply company sending us cases of chemicals and billing us for them, even though we didn't order them. What should we do?
Vendors have for years plagued Fraternity houses with unordered merchandise. With annual turnover of house managers/treasurers, some fly-by-night companies are able to manage to pull this scam by sending merchandise to a chapter and then claiming that someone ordered it.
The way the scam often works is this: First, someone calls the house to get the name of the president or house manager. Then a few weeks later, a package arrives with a large amount of cleaning supplies, toner, paper, etc. A bill often arrives a few weeks later noting that it was a telephone order with that person's name, even though the company may not have even spoken with that officer. The merchandise is often very overpriced.
The fact that these scams continue to occur indicate that all too often Fraternities simply pay the bills without questioning them.
It's important that when such an order arrives, the box not be opened and the merchandise not be used. The president or house manager should make immediate contact with the vendor (via email, letter or phone stating that you did not order the merchandise and that it is available for pick-up). If the items have been used, don't immediately pay the bill if it's way overpriced, since you did not agree to those terms. You'll still be expected to pay a fair market price for the merchandise, but your Greek Life Office or Association Board should be able to help negotiate that. If not, contact the FarmHouse International office and we'll involve our legal counsel team.
When such an event occurs, report it to your Fraternity Affairs/Greek Life Advisor and the FarmHouse International office. Vendors like this often hit several other fraternities on campus at the same time. Encourage the Fraternity Affairs office to have its legal counsel contact the company and the carrier to protest the carrier aiding a fraudulent scheme. The US Postal Service and companies like Federal Express or UPS take these charges very seriously and will make every effort to ensure that they're not involved in delivering goods that are not ordered. Make sure you have the facts in order though. - JG
BACK TO TOP MEN
QUESTION OF THE WEEK? --- Since we're a non-profit, what are the rules about us being tax exempt?
Good question. The summer is a good time to be researching your state's and county's requirements - and see about how you might be able to save some $$$. To begin to tackle this question, we must first look at how the IRS and government qualify chapters and associations.
FarmHouse Fraternity, Inc. is recognized as a 501(c)(7) non-profit organization. The letter ruling that we have with the IRS states that all FarmHouse chapters are subsidiaries of the greater FarmHouse (International) organization. Meanwhile, all of our FarmHouse Associations in the U.S. are independently incorporated as 501(c)(7's) or 501(c)(6's). The Associations maintain ownership of the chapter houses.
The FarmHouse Foundation is recognized as a 501(c)(3), which enables alumni to make tax-deductible contributions to it. These funds must be used for educational purposes. The majority of chapters have a Foundation Council set up through the greater FarmHouse Foundation, while a handful of local groups also have their own 501(c)(3) set up.
So, who's exempt and for what?
1. FEDERAL INCOME TAXES - Chapters and associations are exempt from paying federal income taxes on all related business income. Any outside business income must be spent on educational purposes or be taxed. Examples of outside business income might be income from investments, a second house that's being rented out to non-members, renting parking spaces to non-members. Just because the organization is exempt from federal taxes doesn't mean that IRS filing is not required. In fact, the IRS expects any organization with $25,000 in annual receipts (income) to file a 990 form within 4 1/2 months of the close of your fiscal year (each chapter and association need to determine that if it's not clear). Best advice, consult with an alum who has expertise with this or hire an outside accountant to help.
2. STATE INCOME TAXES - As you'll see below, state income taxes vary from state to state in the U.S. Generally, chapters and associations are exempt from state income taxes in much the same fashion as for federal income taxes. However, you're best advised to consult an alum with expertise or tax professional.
3. STATE SALES TAXES - Again, this varies from state to state. Some states such as Missouri allow 501(c)(7) organizations to apply for tax exempt status for state sales and local sales taxes, other states do not allow any non-profits (501c7's or c3's) to be exempt from sales taxes. To give you an idea of how significant this could be for your budget, consider a chapter with 80 men living in the house that allocates $125 a month in house bills to food and another $25 a month in cleaning supplies/toiletries and such. Such a chapter could save between $5-8,000 a year in sales taxes alone by taking 30 minutes to log on to the web, print out the proper form and pull together the necessary paperwork for the application. No filing fee is typically required. (Do a web search for your state's Department of Revenue to get started).
4. COUNTY REAL ESTATE & PROPERTY TAXES: This one probably applies mostly to FarmHouse associations, but somewhat to chapters as well (since you're otherwise expected to pay property taxes on computers, copiers and contents). This also varies from state to state. Some counties/states recognize a 501(c)(7) non-profit as being exempt from these taxes. Holding a state sales tax exemption letter also helps with gaining this favorable tax status. An example of what this could mean for your Association - some associations pay well over $20,000 a year in property taxes. Such a ruling letter could make a significant difference for your Association.
*** CAUTION - remember the U.S. government only recognizes tax-deductible contributions to 501(c)(3) organizations (ie Foundations). U.S. for-profit businesses are generally taxed at a 35 percent rate. Make sure your chapter/association doesn't jeopardize our favorable tax status by soliciting donations from alumni and making them think that they can write off such donations on their taxes. Any solicitations for donations to chapters or associations need to specifically state that the chapter/association is a 501(c)(7) or (6) and therefore not eligible for tax-deductible gifts. - JG
BACK TO TOP MENU
QUESTION OF THE WEEK?--- "We just got a letter from IRS saying that we need to submit a 990 and that we may owe some money. I thought we were a non-profit and didn't have to pay taxes. What is this 990?"
We're tax exempt from federal income taxes, but not exempt from annually reporting to the IRS.
A great resource for every chapter president, chapter treasurer, chapter advisor, association president and association treasurer is http://www.irs.gov/charities/fraternal/index.html ... It offers a complete breakdown of IRS filing requirements for fraternities.
As the IRS site points out, tax-exempt organizations that have annual gross receipts in excess of $25,000 are required to file the annual information return (Form 990). Nearly every chapter and association amasses at least $25,000 in receipts. Even a chapter house with 7 men living in who pay $4,000 a year in house bills would bump a chapter above the minimum amount.
The 6-page Form 990 looks complex at first glance but becomes much easier after you complete it once. If your chapter or association has less than $100,000 in receipts for the year and your assets are less than $250,000 you can complete the 2-page Form 990-EZ instead.
Because FarmHouse chapters and associations are 501(c)(7) non-profit organizations (some associations are classified as (c)(6)'s, we're exempt from federal income taxes (meaning we don't have to pay the hefty 35 percent taxes that for-profit organizations typically do on income). However, we still must complete Form 990 (or 990-EZ) and submit it annually to the IRS. Not doing so can prove extremely costly. A tax-exempt organization that fails to file a required return is subject to a penalty of $20 a day for each day the failure continues. The same penalty will apply if the organization fails to give correct and complete information or required information on its return. The maximum penalty for any one return is the lesser of $10,000 or 5 percent of the organization's gross receipts for the year.
Chapters and associations that have unrelated business income (for instance, interest income, dividends, income from an annex house that is owned by the association but rented out to non-members, parking lot spaces that are rented out to non-members by a chapter), must either 1) pay taxes on the unrelated business income or 2) set aside the money earned and use those funds on educational programs (scholarships, RLC attendance, Conclave attendance, Leadership Academy attendance, computers, study room/library tables, retreats, etc.). Most chapters and associations should easily be able to use those funds for educational purposes and avoid having to pay unrelated business income taxes.
Importantly, Form 990, Form 990-EZ, or Form 990-PF must be filed by the 15th day of the 5th month after the end of your organization's accounting period. That may mean that your chapter and/or association needs to sit down with your Finance Committee and determine when your chapter or association's year-end will be. We recommend that both entities have fiscal years that run the same (August 1-July 31 is probably ideal).
Another important aspect of filing is for chapters that have employees. The IRS site notes that "Every employer, including a tax-exempt organization, who pays wages to employees is responsible for withholding, depositing, paying, and reporting federal income tax, social security taxes (FICA), and federal unemployment tax (FUTA) for such wage payments."
As an employer, chapters have some important obligations that can prove costly if you don't fulfill your responsibilities. Regardless of whether your cook is student who works 4 days a week and makes $6 an hour or a full-time employee who earns $20,000 a year, you have the same requirements - you must provide worker's compensation insurance, file W2's and withhold proper taxes (employer covers half, employee covers half) and report this information in your 990s.
Chapters may be able to find a local employment service to handle the filings and withholdings. Many chapters and associations hire the same firm to handle W2's , withholdings, obtain worker's comp insurance, etc. for the chapter and help complete and file 990s and fulfill other state tax requirements for both entities. Some smaller chapters that didn't feel like they could afford to pay for worker's comp coverage and fulfill W2, tax and employment responsibilities have decided to simply no longer have a paid cook or housemother and the brothers take turn cooking meals themselves.
Just last year we had a chapter that had a worker's comp claim that ended up paying our more than $35,000. It was a chapter that mistakenly let its policy lapse. Fortunately for the chapter FRMT's liability policy provided stop gap coverage and the chapter only had to pay a $2,500 deductible (meanwhile every chapter's FRMT rates rose by nearly $10 a man because of this claim). As a result of this case, FRMT is considering excluded this stop gap coverage from the FRMT policy.
Hopefully this underscores the importance of completing IRS filings. If you haven't been filing, we'd encourage you immediately contact the IRS at your IRS local office and admit that you were unaware that you needed to be completing these forms and that you want to do things right. From what we've seen in past cases, they'll very likely appreciate your chapter and/or association coming forward and work with you to help ensure that the proper filings are done in the future.
For questions or further guidance, feel free to contact Jim Griffith at Jim@FarmHouse.org or 800-722-1905.
BACK TO TOP MENU
QUESTION OF THE WEEK? --- "We received a 1099 form from our bank, where we currently hold a savings/money market account. What do we need to do to file this? We haven't received one before."
RESPONSE --- You only need to file a 1099 if you have an individual complete work for the chapter or association and you pay that individual $600 a year or more on a contract basis (vs. cooks and housemothers who are considered employees and you must file W2s). A 1099 must be filed for each individual who is considered contracted labor (see www.IRS.gov for more specifics).
For example, the IRS requires you to submit a 1099 if you need to hire a plumber who works on his own and not for an incorporated company, and you pay him $600 or more for services. Other examples might be for an electrician, handyman, painter, accountant, website administrator or designer.
Many of the individuals your chapter/association hires for contracted jobs work for incorporated companies. The main reason the IRS requires this information is to ensure that the individual who does the work (plumber, electrician, etc.) is declaring the money you pay them as income on their taxes. A secondary reason is to ensure that those you contract with are not actually employees of the chapter (such as housemothers and cooks, where chapters must file a W-2 and pay its share of employer taxes, worker's comp., etc. ).
BACK TO TOP MENU
