IRS Nightmare for Soccer leagues

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.

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  1. Interesting stuff. While I can sympathize to an extent, especially regarding the referee situation (my understanding is this is a common way to do business for referees) it’s… well… limited. Because I don’t have a whole lot of nice feelings for people who screw around with the definition of “independent contractor” – yes, it saves the league money on payroll taxes and probably insurance, too; but this is at the expense of the so-called contractor (who is responsible for his own payroll taxes and insurance). A soccer coach does not meet the definition of an independent contractor. If you are told when to show up for work, you are not an independent contractor. You can’t coach a game at any old time. Nor can you hold practice when you feel like it. Paid coaches are employees.

    As for the ref situation – again, a little sympathy, because I understand this is a traditional way of handling things in some areas. But when all this money is changing hands, why take a risk? and I don’t mean just with the IRS. If the referee assignor cannot tell you who did a game, you have a problem. The youth league I played in paid its referees every few weeks by check. If they could handle the recordkeeping, then these big ol’ modern non-redneck leagues can manage it.

  2. For coaches, yes – I agree 100%. However the referee issue is different. We also pay our referees by check every few weeks. For recreational matches. They report to us, we schedule them, we control them. But travel matches are much much different which I tried to highlight above.

    Consider this. My son’s team plays in a city an hour away. The opponent’s league is responsible for getting a referee via THEIR assignor. We have nothing to do with it and have no control over it. However we owe half the fees due the referees, thus pay the referee in cash. Its not done through our assignor, it’s done via the other league’s assignor.

    Considering we play 5 away matches per team, we could have to track down inforamtion via dozens of assignors from dozens of leagues in addition to the home match info we can easily get from our own assignor.

    Now perhaps in this case, you treat the home refs as employees, though as a league we have no say in WHO works, we just rely on the assignor to schedule referees from his/her pool – and they are not tied to our league – they can work for multiple leagues via the same assignor. But perhaps you still treat them as employees and the away refs as independant contractors.

    I know many organizatiosn try to save a few bucks by abusing the designation of independant contractor. but in this case, the travel refs really don’t report to the league. They report to the state referee’s association and their assignor who can decide if they get scheduled for matches or not. Now you coudl say that the assignor is a league official and thus the refs report to the league, but that woudl be incorrect. The assignors are geographically based – multiple leagues will utilize an assignor and their pool of referes.

    As you can see – it can be quite fuzzy.

  3. Hmm, I see what you are saying. Why not just have the league that hosts the game foot the bill for the ref fees? Every team is playing some home matches and some away, right? It would more or less even out. Or, have the leagues whose travel teams play each other pay into a fund. Or, have the home league pay and then have the away team’s league cut a check to the home team’s league later.

  4. The first option is tricky because not all seasons and teams will have an equal amount of home and away matches for a variety of reasons. They try to ensure everyone has an equal number, but you can’t ensure that. So it wouldn’t be fair to some leagues to foot a bigger part of the referee bill because they had more fields available than smaller leagues, etc.

    Paying into a fund might work, but adds a level of administration. You could pay the assignor up from for the matches worked and have them handle the payroll, but that would significantly add to their burden, resulting in them having to charge MUCH more for their services and raising the cost for everyone (leagues handling it spreads the load, etc)

    Cutting a check to the other league would be a nightmare – turning some leagues into bill collectors trying to collect fees from other leagues. Not sure it would matter in the eyes of the IRS or not.

    Good suggestions, but in the fun world of youth soccer, things can be a real pain due to the number of different leagues involved.

  5. A suggestion for the travel refs. Don’t all 3 refs sign match reports? If the ref association would require a SSN or TaxID before issuing certification, and allow leagues to report income paid, it would be possible to track this way. It would require some additional manpower and paperwork for the State associations and the regional leagues (and make fees increase), but there is a system in place to make this work (the match report system). All Challenge leagues may not currently require the entry of ref names into the system when scores are reported, but they could change this. I seem to recall from years ago, when I managed my son’s team, the refs all had to sign the match report.

  6. I have just taken on the Financial Director position for a Not For Profit soccer league.
    I do not carry a CPA, but I do have a good financial process background. Our league does not have paid Coaches, so we do not seem to have a problem here. When I looked at the common practice of cash payment to the Ref.’s I was astonished. Years back they would have been below the $600 annual figure, but year after year the Ref.Assignor and the Ref.’s association continually increase fees to ref. the games. Several years ago the bookkeeper decided to issue 1099’s to the Ref’s, and there was a complete backlash that there would be no Ref.’s available for our games. The poor chap was forced to backtrack the issue. The Ref.’s and the Assignors threatened not to provide any services to the league anymore.
    The league does not want to get into any trouble with the IRS as they are Not For Profit, and any pennalty would kill the organisation made up of 100% volunteers (not paid at all). The league really believes that the Ref.Assignors and the Ref.’s they assign have real control over our League. You try putting together a league schedule without the guarantee of ref.’s, and you will see thousands of disgruntled soccer players looking for a refund immediately. We are forced to continue the status quo. So do not tell me that the Ref.’s assignors and Ref.’s are controlled by the League. My opinion is that it is the opposite. The simple fact is that you can not put on a sanctioned event without using sanctioned Referees. The League does not control the pool of sanctioned referees, and there is no other Ref’s available. Talk about job protection. This is the dream of any labour group to be able to have this kind of Union influence without it being officially called a Union!
    My vote is for the IRS to penalize the Referee Assignors and the Referee association, not the Leagues who are the victims!
    Just my 2 cents.

  7. I wonder if this is what the IRS would call “Guilt by association” or should I say Ref. association.

  8. Very interesting. We don’t expect to try and cut 1099’s for our travel refs (the ones paid in cash at the fields) which are handled by a referee assignor that isn’t tied directly to our league. However for our recreational division, we may just bite the bullet and treat them as employees because it so much easier t have direct control over the refs for Rec. But that also means an additional budget hit related to taxes, FICA, etc. There’s no telling. Even worse is the fees that some referee assignors demand – as high as $50/team.

  9. Our assignors charge $7 per game, and with typically 10 games per season, the tally is $70 / 2 = $35 per team per season. Our league operates 4 seasons, and therefore that would come to $140 per team per year.
    Refs. are $50 for center, and $25 per line = $100 for Ref.’s per game.

    How badly are you being hosed?

  10. WOW – $50 for a center? At what level? Your ARs make more than our Rec centers! The state sets caps on ref fees for all our affiliated leagues. Here’s what the going rate per game is in NC currently (center/line) which is generally split across both teams:

    Recreation: from $24/$12 (U12 down) up to $38/$23 (U17 and up)
    Challenge: from $28/$15 (U12 down) up to $44/$29 (U17 and up)
    Classic: from $32/$18 (U12 down) up to $50/$35 (U17 and up)

    The recreation fees are caps – many associations pay a bit less than that (we pay $20/$10 I believe with a slight bonus if you’re certified) I think the rates we have in NC are fair – reffing at the upper levels is intense and that $50 is well earned most of the time. Plus dealing with abusive parents can often make that $35 seem not worth it!

    Since the bulk of our matches are U12 and below, few of our matches pay more than $32 to a center.