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How can employers provide tax-free education benefits to employees?

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Many organizations want to help employees continue their education, pursue professional certifications, or develop new skills. They are often surprised to learn that employer-paid tuition and education expenses are generally taxable compensation for the employee unless specific exceptions apply.


The tax code allows for two primary programs that organizations can implement to provide tax-free benefits to their employees. Understanding these options and when they should be used can help organizations support employee development while avoiding potential payroll issues.

Educational Assistance Programs

The first program is an educational assistance program (EAP) established under Section 127 of the Internal Revenue Code. This approach allows employers to provide up to $5,250 for each employee, per year, in educational assistance without the amount being included in the employee's taxable wages. One of the biggest benefits of this plan is that the education does not need to be related to the employee's current job responsibilities.

What do you need to do to establish this program?

To qualify for this tax-free benefit, the organization must accomplish two primary objectives: they must adopt a written plan outlining the offered benefits and ensure that the assistance is offered to all employees who meet the reasonable eligibility requirements established by the organization, without discrimination. An employer can establish reasonable eligibility requirements, such as a minimum period of employment or full-time status, and may prorate the benefits for part-time employees. The organization's eligibility requirements should be clearly stated in the written plan and applied consistently for all employees.

Under this program, eligible education expenses include:
  • College or graduate school tuition
  • Books and supplies
  • Professional certifications 
  • Online courses.

Working Condition Benefit

This second program is less common in smaller organizations but can provide even more value. Under the working condition benefit rule, employer-paid education can be completely tax-free if the education primarily benefits the employer and is directly related to the employee's current job responsibilities. 

Unlike the first program, there is not an annual limit if the education qualifies, a written policy is not required (although it would be recommended), and the benefit is on a case-by-case basis. Further, it does not need to be made available to all employees.

What do you need to do to establish this program?

To qualify for this benefit, the education must meet one of two tests: 

  • The courses are required by the employer or by law to keep the employee's salary, status, or job and serves a business purpose of the employer; or 
  • The courses maintain or improve skills needed in the job. 

If the courses meet 1) the minimum requirements for the current job or 2) qualify the employee for a new trade or profession, the IRS generally does not allow education benefits to be tax-free when employers implement the Working Condition Benefit.


There is one further program for education assistance, available only to educational institutions, which allows for a tuition reduction that can be extended to dependents of employees, as well, but that is beyond the scope of this post. 







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