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Fringe Benefit to Teachers of Christian Schools: Children's Education

Question:

A church has a school affiliated with it and part of the compensation for the teachers is free tuition for their children. Is this a taxable fringe benefit? If yes, is the school required to pay FICA tax on the value of the tuition?

Answer:

According to the IRS's Taxable Fringe Benefit Guide,

"Free or reduced tuition for employees of educational institutions may be excludable to employees. The term "qualified tuition reduction" means a tax-free reduction in tuition provided by an eligible educational institution. At the undergraduate level, the education need not be at the same institution where the employee works. Whether a tuition reduction is a qualified tuition reduction, and therefore excludable from income, depends on whether it is for education below or at the graduate level. The qualified tuition reduction must not represent payment for services." (An important point that we will address below).

Further, "a qualified educational organization is one which:
  • Maintains a faculty and curriculum, and
  • Normally has a regularly enrolled student body on site."
Schools must assure that tuition benefits are provided on a non-discriminatory basis, in addition to and not as a substitute for standard compensation for their services.

According to the IRS, "generally, a qualified tuition reduction cannot discriminate in favor of highly-compensated employees (for 2012, employees with total compensation exceeding $115,000)."


Also, "a fringe benefit is a form of pay (including property, services, cash or cash equivalent) in addition to (our emphasis) stated pay for the performance of services."

Should a school provide tuition-free education as the only source of compensation for services or as a benefit on a discriminatory basis, it will be in violation of IRS rules unless it treats the fair market value as both income taxable and FICA tax wages.

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