Do you owe taxes when your employer pays educational expenses for you?
Whether or not you owe tax on this fringe benefit depends on a number of factors. It has become quite common for employers to help employees out with certain education expenses that will eventually benefit the company. A tax break allows an employee to receive up to $5,250 a year of tax-free educational assistance under an employer’s educational assistance program.
Information About Employer-Paid Employee Education Expenses
The company will have to follow special rules on who qualifies for these benefits. This benefit can apply to almost any type of education even if it is not related to the specific job function that the employee has.
What is a Qualified Educational Assistance Program?
If an employer pays courses through a qualified educational assistance program, all the benefits will be tax-free to the employee. This education assistance program can provide benefits beyond tuition. Besides tuition, this tax-free assistance can cover related fees, books, and supplies. However, you cannot receive tax-free advances or reimbursements for items that a taxpayer will keep after the program is done.
Employers Paying Tuition
If your employer-paid educational benefits are from an educational assistance plan, they still may be tax-free. This will only happen if a number of conditions are met such as that the education is part of your job. Mainly, the education must:
- help you maintain or improve your employment skills,
- or be required for you to keep your job, your salary level, or your current status.
The key distinction is that the education provided by employer payments cannot enable you to meet the minimum qualifications for your job, or qualify an employee for a job in a new trade or business.
Payment must be for “educational assistance”
- This includes tuition, fees, textbooks, and in-class supplies and equipment.
- This does not include tools or supplies which may be retained by the employee after completion of the course. (For example, if an employee purchased a financial calculator to assist with a class and retained the calculator after the class, it would not be eligible.)
- This also does not include meals, lodging, or transportation.
- Finally, this does not include any course or other education involving sports, games or hobbies.
- Subject to the limitation on sports, games, and hobbies, the education does not have to be work-related or part of a degree program.
Employees may not be given a choice between educational assistance and other payments. For example, an employee cannot be given a choice between $2,000 in cash versus the employer paying a $3,000 tuition bill–this would cause the payment of tuition to be taxable to the employee (in the full amount of the $3,000 tuition).
Substantiate Education Expenses
Lastly, in order to receive educational expense advances deductions or reimbursements tax-free from your employer, the employee must be able substantiate the expenses to your employer, and you must be required to return any excess amount that your employer may have advanced to you that are not spent on educational expenses.
Specific IRS publications will help in determining whether your employer-paid educational benefits are tax-free.