If you’re working a full-time job and want to improve your career prospects, check to see if your employer has a tuition assistance program. Now, let’s say you paid for college through the G.I. Bill, and want to get more eduction or have debt from either grad school, med school, law school, etc. Many employers have policies that either help pay tuition, school expenses, or student loans from a past degree.
The question you may have this time of year is, “is tuition reimbursement taxable?”
Let’s break down tax rules for employer’s tuition assistance programs to help you better understand if your employer’s tuition assistance is tax-free or considered regular income during tax season.
Tax Rules for Employer’s Tuition Assistance
Is tuition reimbursement taxable? Generally, employer tuition assistance programs are tax deductible up to a limit set by the IRS. That means you don’t have to pay taxes on your benefit unless it exceeds a certain amount.
Through December 31, 2025 the IRS will allow up to $5,520 in education assistance to be tax deductible.
Employer Tuition Assistance Deduction Amount
An annual employee tuition assistance program deduction applies to your education and other family members, such as your kids. If you receive more than the amount the IRS will allow, it will be considered taxable wages.
Example: If you earn $50,000 in a calendar year and get an additional $5,250 in tuition assistance or student loan payment assistance, you’ll pay taxes as if you earned $50,000 from your employer in the year rather than the $55,250 you effectively earned.
If the payments total less than $5,250 and qualify as a “fringe benefit”, your employer does not need to include them in your wages on Form W-2.
Note: Payments over the annual IRS limit are typically included as regular compensation in Box 1 of the W-2 form.
Eligible Items for Tuition Assistance Tax Deduction
While you can use tuition assistance plans for several parts of your education, you can’t use them for just anything.
For many employer tuition assistance recipients, the most straightforward use is paying tuition and fees directly to the school. More care is required when using the proceeds for books, equipment, and supplies.
Example: Books only qualify if they’re required for your coursework. You can’t use the funds for a shopping spree at your favorite bookstore. A good way to cover yourself in the event you’re audited is to keep a syllabus or proof that a particular book was needed.
If you’re in school, have already graduated, or attend a private university and the G.I. Bill and Yellow Ribbon Program won’t cover all of your costs, you may still have an opportunity to save on taxes while taking advantage of an employer education benefit. If your employer offers student loan payments or other student loan support, that benefit is also typically not taxable up to the annual IRS limit for eligible student loans.
You’re also prohibited from using a tax deduction for sports, games, hobbies, or non-credit courses. If you’re part of an intramural sports team, even if it’s through your school, you can’t use tax-advantaged funds for those purposes.
These rules can get complicated in some situations, so if you’re in doubt, you should read IRS tax guides for employer education benefits. Many tax software programs, such as TurboTax and FreeTaxUSA, offer walkthroughs to help you decide what to deduct. When in doubt, it may be best to reach out to a tax professional for clarification. Remember that some tax apps come with free or discounted versions for veterans.
What Qualifies for Tuition Assistance Deductions
We’ve already discussed specific items that qualify for tuition assistance deductions, but you may find you can use employer education benefits for other deductible purposes. Here are some examples of when you may be able to take advantage of an employer’s tuition assistance program and tax deductions.
Your Education
The most straightforward option for employer tuition assistance is paying for your further education. Whether it’s a trade school, certificate, or college degree, many employers are willing to invest in their employees’ educations. Depending on the employer, it may not have to be directly related to your current role.
In some cases, you’ll have to agree to stay with the employer for a minimum time after receiving the financial assistance. Always closely review the program details before applying to ensure you don’t run into any surprises down the road.
Personal note from the author: I was lucky to work at a large employer early in my career that helped pay for my MBA. I received several thousand dollars tax-free toward my education. If I can do it, so can you!
Your Student Loans
As the cost of education grows over time, so do student loans. Many savvy companies seeking to attract the best talent offer student loan repayment assistance. Like a tuition reimbursement program, you can get these funds tax-free up to the annual IRS limit.
You can use the benefits for loan payment assistance or lump sum payments to chip away at your loan balance.
Your Child’s Education
Just as some companies help their employees pay for higher education, many offer assistance with the cost of a child’s education. If you have kids in college or are going soon, check with your HR department or read your employee benefits guide to find out if that’s an option.
Prior Year Education Expenses
Even if you can’t take advantage of an employer education reimbursement this year, you may be able to apply deductions from prior year education expenses. Your tax software or trusted accountant can help you better understand if you have prior-year deductions or credits available this tax year.
You’ll often have to file an amended tax return for the prior year to capture the missed credits or deductions. But that’s often worthwhile if you can get back hundreds or thousands of dollars in prior year taxes.
Common Practices of Employer Tuition Assistance Programs
Employers are finding increasingly innovative ways to entice new hires and keep their current employees happy. Education assistance programs are a great way to help employees while potentially getting more value from better-educated workers.
Each employer offering employer tuition assistance has its own criteria and rules. Understanding common requirements can help you navigate the application process to be sure to look further into certain aspects of the programs:
- Tuition reimbursement: Some employers pay directly to the school, while others reimburse you for tuition, fees, or other eligible costs after you’ve paid for them. Find out if reimbursement is made quarterly or after the end of each academic term when grades are received. If you intend to go to college and take advantage of the employer’s tuition assistance, you’ll want to make sure the cost of tuition is in your budget so you can continue taking classes even if the reimbursement is delayed (or denied).
- Minimum GPA requirements: Many employers offering tuition assistance require that you maintain a minimum grade point average (GPA). Some programs pay more for better academic performance and deny payments for poor performance.
- Major or field of study requirements: Some employers require that the courses you take directly relate to your current position or a potential future position within the company.
- Must remain with the employer: Many employers also stipulate that you must work for the company for a minimum time period after receiving tuition assistance from them. If you leave for any reason, including being fired, you may have to pay back their investment in your education. The employer wants to know if their investment in your education will help them, too. They want to ensure you aren’t going to get your degree and then leave.
It’s important to know these aspects of common employer tuition programs because you don’t want to incorrectly report them on your taxes in the event that you didn’t honor certain requirements.
What You Need to Know
While using your G.I. Bill can greatly reduce the cost of college, the price tag for additional education or certification classes continues to grow. Utitlizing employer tuition assistance programs can be a double benefit:
- Assistance paying for school
- Tax benefit when reporting your income
Both options keep more money in your pocket, so don’t leave that assistance on the table.
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Bruce says
If my wife’s employer has a tuition reimbursement benefit for our twin college-attending daughters (50% of just Tuition; not Room or Board), does that also consider the first $5250 as tax exempt? I know it adds to her Taxable Income, but it is not clear whether the $5250 has or has not been subtracted either on the W-2 or her pay statements.
Ryan Guina says
Bruce, this is a question for a tax professional.
Sue says
Ryan,
I wish I knew about these information before I started my master’s program 2 years ago.
I am on the path to graduate this August from a private school and have been taking advantage of my company’s tuition reimbursement program (100% covered). As you mentioned in the article, my company pays a portion of a completed semester and keeps the rest until after I obtain my degree. I am grateful for the opportunity, but ran into a lot of unexpected situations along the way.
I didn’t even know about the $5,250 tax deductible limit (absolutely my fault), which left me with no choice but to take out student loans to cover for the semesters. Also, the reimbursement was reported as income and put me in a bitter situation when I was filing for taxes this year.
I wanted to ask as to how the tax on tuition fee after first $5,250 limit is calculated?
E.g. If my company paid $10,000 for the semester in the beginning of the year, first $5,250 is tax exempt, but how would the remaining $4,750 get taxed? Would it be based on my tax bracket or is there a specific formula?
Ryan Guina says
Sue, I believe it is taxed as income. If so, I believe that would fall under your marginal tax bracket.
Dermot Dillon` says
My son is a University employee. The University offered him the opportunity to get his Masters degree and said all he would have to pay is the tax. Sounded good at the time. He gets paid monthly and on his most recent pay stub, the University reported 1/12th of the years tuition to his taxable earnings for the month. This new total sends him into another tax bracket, resulting in his take home pay being half of what it was the month before. With the few bills he does have (ie rent, a car payment, utilities and insurance) this puts him in the red for the month.
Why couldn’t the school issue him the tuition as a 1099 or 1098T as described in some of the other posts. They did present it similar to a scholarship. Perhaps he could get a student loan to pay for this. ( He has no debt from his BA degree) This way he could at least live each month………..or have to drop the program completely just to be able to live
Ryan Guina says
Dermot, Your son should speak with his HR department to better understand the employee education benefit, and how it is recorded for tax purposes. They will surely have some guidance on this. He should also ask if there is a way to stretch out the benefit over time, or, as you suggested, take out a loan to pay for the benefit.
He can also inquire about his W-4, which determines his income tax withholding levels. It’s possible adjusting his W-4 will provide him with more take-home pay.
If none of this sheds light on the situation, then he should consult with a tax professional to help him better understand both this benefit and his paycheck.
Best wishes.
Serrana says
If tuition in excess of 5250 was taxable in 2014 qne 2015 and then employee did not stay with employer after graduation he/she must pay tuition back in 2016. What happens with taxable amount added to prior’s yr W2?