I wrote a while back about a soccer league that had been severely penalized by the IRS for improperly classifying youth soccer coaches as independent contractors instead of as employees:
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.
This was a huge issue since almost all youth soccer leagues pay their referees and coaches this way. It would have placed a significant administrative burden on youth sports leagues, especially smaller ones who couldn’t afford to pay CPAs to handle everything.
Well, the IRS and Fairfield have reached an agreement that will affect youth soccer leagues (and other sports) nationwide, but wasn’t nearly as bad as it could have been:
In a case widely watched by youth sports leagues across the country, the Internal Revenue Service has reached an agreement with the Fairfield United Soccer Association that clarifies the employment status of the group’s coaches, the association’s president said yesterday.
Under the agreement, the Fairfield, Conn., league will begin in 2008 to treat about half of its 30 coaches – those not employed by professional coaching associations – as employees rather than as independent contractors, and will withhold taxes from their pay. And the league will pay $11,600 in back taxes, according to Jay Skelton, the group’s president, a fraction of the $334,441 in taxes and fines the I.R.S. had assessed it in 2004.
“We said we tried to comply with the rules, and we thought we were, but we made mistakes, so we agreed to pay the tax due,” Mr. Skelton said. “For 20 years all of these coaches have been reported as 1099 employees for everybody. If you talk to 100 clubs, I guarantee almost every one, if not all, would declare these guys as independent contractors.”
“Unfortunately,” he added, “we became the test case.”
Thankfully the IRS didn’t push the penalty they had originally set as that would have completely bankrupted the league. The good thing is this agreement clarifies some things. First, coaches need to be paid as employees. It was always a bit murky with coaches because while they could work for two leagues at once, they generally don’t and the leagues usually held control over what they could or couldn’t do. I think that Fairfield thought they were too, but crafted contracts and agreements to try and make it seem like they were independent contractors.
However, the important part to note is “those not employed by professional coaching associations” This makes this a pretty sensible decision and will significantly reduce the impact of this for soccer leagues. Why? Referees. The IRS had originally said that ALL coaches and referees should have been treated like employees. Referees belong to state-wide professional associations and are paid for their services. They are usually assigned by an independent person affiliated with the association, not the league. Given how many referees a league uses in a year, tracking all their information and handling all the paperwork to treat them as employees would have been next to impossible. Plus the way referees are handled seems to be the textbook example of an independent contractor.
This also may spur more coaches to join coaching associations like the NSCAA – I expect many clubs may require coaches they pay to be part of an association just to reduce the paperwork. Only time will tell. One thing that is confusing is why membership in a professional association made the difference. While referees get assigned to leagues by their association, it’s not common for coaches to be. They usually negotiate with the leagues independently. SO why is a coach who is part of a professional association suddenly a qualified independent contractor? I’m glad they are, but it wasn’t entirely clear why.
As a league administrator, this was a HUGE case. The impacts would have been seismic if the IRS had continued to insist that all referees as well as all coaches were employees. The fact that they backed down on this and used the professional association as the litmus test makes things much less severe for soccer leagues. So if you’re a league administrator and have paid coaches, it’s time to get really familiar with how to withhold taxes and pay the unemployment tax!