I probably should have written about this months ago, but it sat in my draft queue with a dozen other items waiting for some attention. Time to dust some of these off.
Back in late June as the World Cup was in full swing, The NY Times wrote about a soccer league hit with $334,441 in fines and back taxes.
For the past two years, the association has been grappling with an I.R.S. audit that found the association failed to withhold taxes for a dozen paid coaches and scores of referees in 2003 and 2004. The I.R.S. assessed the association $334,441 in back taxes and fines
The Fairfield case – which centers on a dispute over whether coaches and referees are employees or, as the league contends, independent contractors – is not the first time the I.R.S. has fined a nonprofit youth sports league. But the penalty is one of the largest, and it has sent worried sports officials from Connecticut and other states scrambling to review the finer points of the tax code.
"A lot of clubs are going through the same type of audit situations, and they’re watching our case to see how it turns out," Mr. Skelton said.
Indeed, youth sports clubs, literally once mom-and-pop operations, have grown so large and sophisticated that they now require payrolls, registrars and 1099 forms. Some boards have hired accountants and lawyers.
You read that correctly. A youth soccer association was penalized for well over a quarter million dollars due to how they paid their coaches and referees.
The audit was initiated because the soccer association treated coaches and referees as independent contractors instead of employees. This is important because an organization must withhold taxes and pay unemployment tax for employees, but not for independent contractors. This is a common issue, one the IRS has worked to clarify:
Who is an Independent Contractor?
A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Who is an Employee?
A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.
Taken in the context of a normal soccer league and going by the IRS’s own documentation, there doesn’t seem to be much doubt about coaches who are paid for coaching teams. Team coaches report to the league which sets the rules and goals and are employees if they are paid. However, that can get murky if they are ‘skills coaches’ who come in to hold training clinics for players, help run summer camps, etc. This is what got the Fairfield association in trouble:
Generally speaking, if an organization has direct control over a person’s work, he or she is considered an employee. Independent contractors, on the other hand, tend to own their own businesses, work for a variety of clients, supply their own uniforms and gear, and have the right of refusal to work any assignment.
Mr. Skelton said that many of the league’s skills coaches were employed by a Long Island soccer camp and defined under the contract as independent contractors.
Why would your skills coaches paid $2500 a season be under contract via a summer camp? While the Fairfield administrator feels victimized because they thought they were doing the ‘right thing’, tidbits like specifically defining a skills coach as an independent contractor via a summer camp contract seems odd. But maybe that’s a normal thing. What makes this sort of scary is, if anyone should have known the implications, it was this league who had multiple CPAs and lawyers on their board.
However, even more alarming for any youth soccer league is the additional information from the local paper about how the IRS viewed the referees for the travel teams. Referees for travel team matches are assigned by an independent state ‘assignor’ and are paid in cash by the teams at the match. Leagues don’t really control them – only the result (officiating the match). Since the leagues are basically saying ‘give me referees for this match’ and pay them on the spot, most leagues feel this fits the definition of an independent contractor. I know we did.
Lets dig into some more of the background of the Fairfield case. The local paper had some additional information about it, including the fact that the league board/officers were made up of a number of CPAs and lawyers. The IRS felt they should know better:
The nonprofit organization, which is made up of about 45 teams, has employed as many as 60 coaches and other staff but has not paid the required employment and other taxes, along with not meeting other IRS requirements, according to a letter and other documents sent to FUSA and signed by IRS Revenue Agent Samuel Stein. Both the treasurer and the president of the soccer organization at the time the complaint was made last year are certified public accountants who should have been familiar with IRS regulations, and two board members at that time were attorneys, the documents also state.
It sounds like they use a very similar setup as North Carolina and the IRS still felt the referees were employees:
As a result of its investigation, the IRS determined the nature of the relationship between coaches, referees and the league was that of an employee and employer, and penalized the Fairfield United Soccer Association for not filing W-2 and 1099 forms for those who earned $600 or more from 2003 to 2004, as well as other employment-related forms.
"The Government finds that the coaches working for FUSA are employees … the government finds that FUSA had $172,285.60 in unreported wages for the year 2003 and $205,932.14 for year 2004," the investigation report states. The report includes similar conclusions about referees working for FUSA.
Skelton disagrees. "A lot of these guys are full-time coaches at colleges," he said. "They coach teams for us as private contractors."
"FUSA has maintained inadequate records," the report also states, also noting that the organization failed to obtain Social Security numbers from some of its employees, and did not record cash payments made to some employees or keep a complete list of those payments.
"The Organization made payments to [reimburse] individuals who claimed to have made payments [to others] for referee services. The vouchers did not include the names of the individuals who performed the services and were paid in cash," according to the IRS report.
In the "Taxpayer’s Position" section of Stein’s report, association representatives say that "no one at FUSA thought of issuing the 1099 [forms]s." The organization did not keep records for payments to referees, the report says, because it did not pay referees directly. "… the payments were made to parent-coaches and managers to reimburse them for payments which they made to the referees," the report says.
The referees, who were mostly high-school age, FUSA said in the report, usually received less than $600 per year for refereeing. Complete records were not kept because parent-coach/managers were put in touch with referees by a referee assignor, or coach/managers contacted referees directly, and in some cases referees would switch games with other referees.
That right there should send up HUGE red flags to a lot of soccer associations. Here is how a number of associations handle getting officials for their ‘home’ matches for their travel teams. They pay a ‘referee assignor’ to handle the scheduling of officials that are in the assignor’s pool to each home match. These referees will work matches for any league in their area, not just for a specific soccer league. The assignor maintains the schedule of officials for multiple leagues in their area or sometimes just for a specific league. However the assignors report to the state referee organization, not the league. Just as if you would hire a temp agency to bring in help for a given task, your referee assignor will schedule referees to work your home matches. Away matches have officials scheduled by the home team’s league referee assignor – making it even harder for the ‘away’ league to know who worked their away matches. Where it gets tricky is this: to ease the administrative burden, the referees are paid in cash at the matches since each team pays for half the total due to the officials, home or away. The team managers simply bring the appropriate amount of cash with them. The money does not route through the assignor. I expect this may be what the IRS felt was wrong. I can see why the league didn’t have 1099s for them – sometimes you have no idea who will work a given match until you show up, especially for an away match (since the ‘home’ league ensures they are scheduled via an assignor). You have no say over who works your match. It would be next to impossible to collect SSNs for them. Realistically, the referee assignor should be able to report to the leagues that a given official worked X matches for them, paid Y dollars (based on the going rates), and allow a league to file a 1099 for them. But that’s a lot of legwork and only for the team’s home matches, so you can see why leagues want to keep it at an independent contractor level. I would bet that most leagues treat travel referees as independent contractors, making this a widespread issue.
There is no question that this is a potential minefield for many leagues. In this case, the IRS penalty was just about equal to the annual budget of this league. There is no way they can pay that and survive. This should serve as a wakeup call to all youth leagues that they really need to get a grip on their finances and record keeping. If you aren’t using Quickbooks at the very least, run by someone who knows how to use it, you’re asking for trouble. Beyond that, leagues really need to assess who they pay money to and how. On the surface, our league figured our recreational referees were employees but the travel referees were independent contractors. In this audit, the IRS doesn’t agree. This presents a significant administrative hurdle given how the travel referees are scheduled and paid. Currently we’re trying to keep records the best we can, but I seriously doubt that we’ll file W-2’s for the travel referees unless we can get reliable information from the referee assignors, which is unlikely since your league assignor only handles your home matches. Other assignors handle referees working your away matches.
I’m curious what other leagues have done related to this. How do you treat your referee payments and any payments to your coaches. Do you treat all of them as employees? That can be a lot of paperwork. Even in our moderate size league we probably will have to file paperwork for almost 30 people. It is a daunting task. Referees represent the largest expenditure we have as a league as they are pretty much the only people paid for what they do. Almost everything else is handled by volunteers.
I’ll be sure to post any updates on this issue as quickly as I can.