Tutoring Business Payroll Management

Question

I currently run a tutoring organization with some other high school students (I live in Illinois). Our organization is just now getting paid gigs from local schools and libraries. Since the school year is about to start, we are looking to bring on about a dozen or so more tutors. We have only had one paid gig so far, which we are all supposed to be paid individually for (although we have several other paid gigs planned for the up and coming weeks). Our first school asked us if we'd like to be paid individually (which they said they'd prefer), or if we want just one check.

The problem with being paid individually is that not every tutor will work the entire session, and a tutor may attend one week, but not the next. We will be keeping track of the hours worked by the tutors internally, but the schools will not. We would prefer to get one check given to our organization because we have expenses that we need to be paid for (like advertisements, t-shirts, business cards, website, etc). We want to get one check from the schools, take a portion out of that for expenses, then pay each tutor according to the # of hours they worked.

My question is: If we collect the payment in one sum in form of a check, are there any sorts of taxes our organization needs to pay on that sum, and then when we distribute that money out to our tutors will they have to pay any sorts of taxes on their sum.

I need to know if I'm breaking any laws/regulations by collecting our payment through one check, then redistributing to our tutors accordingly.

Sorry if I'm being too vague/not making sense. Please let me know of any clarification you need.

Answer 1

This is going to depend on the tax jurisdiction and I have no knowledge of the rules in Illinois. But I'd like to give you some direction about how to think about this.

The biggest problem that you might hit is that if you collect a single check and then distribute to the tutors, you may be considered their employer. As an employer, you would be responsible for things like

1. The employer's share of Social Security and Medicare.
2. Withholding of taxes.
3. Unemployment.
4. Workman's compensation.
5. If you have enough full time employees, health insurance.

This is not meant as an exhaustive list.

Even if not an employer, you are still paying them. You would be responsible for issuing 1099 forms to anyone who goes above $600 for the year (source).

You would need to file for a taxpayer identification number for your organization, as it is acting as a business. You need to give this number to the school so that they can issue the correct form to you. You might have to register a "Doing Business As" name. It's conceivable that you could get away with having the school write the check to you as an individual. But if you do that, it will show up as income on your taxes and you will have to deduct payments to the other tutors.

If the organization already has a separate tax identity, then you could use that. Note that the organization will be responsible for paying income tax. It should be able to deduct payments to the tutors as well as marketing expenses, etc.

If the school will go for it, consider structuring things with a payment to your organization for your organization duties. Then you tell the school how much to pay each tutor. You would be responsible for giving the school the necessary information, like name, address, Social Security number, and cost (or possibly hours worked).