Skip to main content

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

By

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. 







Comments

Post a Comment

Popular posts from this blog

Church Car Purchase for Pastor

By
Question: A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement? Answer: The church has two main alternatives for this purchase:  Title the car in the pastor's name and reimburse him for business expenses Title it in the church's name and treat personal use as taxable compensation There are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post. If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The...
2 comments
Read more

Can Form 4361 be filed after the deadline?

By
Question:   Is it possible to opt out of Social Security after the 2-year deadline? Answer:  Unlike other employees, a licensed or ordained minister has the option to opt out of Social Security and Medicare (FICA). If a minister wants to opt out they must file Form 4361 by the tax deadline including extension, in the second year in which they have received ministerial income of $400 or more. This election is final, and the minister cannot opt back into FICA taxes.  At MinistryCPA, we have received questions from ministers who have exceeded the two year deadline and desire to opt-out. There have been several court cases which provide guidance in answering this question. Some have argued that the minister was unaware of the deadline, had mistakenly believed they had filed a timely election, were given incorrect advice by an IRS employee, or their opposition to participate in Social Security and Medicare did not arise until after the 2-year deadline had passed. In each of th...
Post a Comment
Read more

Form 941 or 944 - Which Should a Church Use for Payroll Reporting?

By Anonymous
Question:   Are churches required to file a Form 944 annually to report their employees' earnings and tax-withholdings? A quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Techniques Guide  explains in further detail a minister's treatments for Social Security, Medicare tax, and income tax withholding.   Form 941 or 944 must be filed when non-ministerial employees are compensated or when ministers request withholding. When can a church file the annual Form 944 rather than filing Form 941 each quarter? The IRS may permit the annual filing of Form 944 for employers wh...
Post a Comment
Read more