Tax Rules for Employer’s Tuition Assistance

When you are considering a job offer, it’s always important to look at the “fringe benefits,” which are employee benefits that go above and beyond salary. Fringe benefits include health plans, life insurance, accident insurance, educational tuition assistance, travel compensation, company cars, and a variety of other benefits. Some fringe benefits can be fully or…
Advertising Disclosure.

Advertiser Disclosure: Opinions, reviews, analyses & recommendations are the author’s alone. This article may contain links from our advertisers. For more information, please see our Advertising Policy.

default image

When you are considering a job offer, it’s always important to look at the “fringe benefits,” which are employee benefits that go above and beyond salary.

Fringe benefits include health plans, life insurance, accident insurance, educational tuition assistance, travel compensation, company cars, and a variety of other benefits.

Some fringe benefits can be fully or partially tax-deductible if they meet specific conditions and IRS requirements. Let’s take a brief look at employer tuition assistance and how it might affect your taxes if your employer offers it.

Tax Rules for Employer’s Tuition Assistance

Employer Tuition Assistance

Employers are allowed to provide up to $5,250 in educational expenses as a tax-free fringe benefit to their employees. This includes undergraduate and graduate-level courses. Anything above $5,250 is generally considered as taxable income.

However, there are some exemptions. If you receive assistance over $5,250 it is excluded from your income if the education is a qualified, working-condition, fringe benefit.

Pro Tip: Taxes can get really complicated. Things are often made easier by using tax-software such as FreeTaxUSA, H&R Block, or TurboTax.

Qualified Working-Condition Fringe Benefits: the IRS defines qualified working-condition fringe benefits as property or services given to an employee, that would otherwise be an allowable tax deduction for that employee – for ordinary necessary trade or business expenses or depreciation expense.

This means if an employee would be able to deduct the cost of the education as a business expense, a necessary trade expense or depreciation expense, then the amount of employer tuition assistance provided over $5,250 is excluded from your income.

How taxable tuition assistance is documented: If there is a taxable amount to your education tuition assistance, it will be included in your W-2 wages.

How to Make the Most of Employer Tuition Assistance

Employers are looking for more and more ways to entice new hires and to keep their current employees happy. One of those is to help their workers continue their education.

Each employer offering employer tuition assistance has its own set of regulations and criteria. Understanding the common elements involved in most tuition assistance programs will help you make the most of the assistance:

Tuition reimbursement – some employers do not pay your tuition expenses directly to the university, and will only reimburse you after you’ve made the payment.

Sometimes the reimbursement is made quarterly or at the end of the semester after grades are received. This means if you intend to go to college and take advantage of the employer tuition assistance, you’ll want to make sure the cost of tuition is in your budget so you can continue taking classes even in the event the reimbursement is delayed.

Sometimes students will pay with a credit card offering rewards programs, so they can gain the rewards, make small payments on the card, and then just pay it off fully when the employer reimburses the tuition expenses.

Minimum GPA requirements – most employers offering tuition assistance require that you maintain a minimum grade point average (GPA). There are some programs that pay 100% of tuition expenses for students receiving an A grade; and lower percentages of tuition for lower grades. Make sure you understand how your company offers tuition assistance.

Major or field of study requirements – most employers require that the courses you take are directly related to your current position, or a potential future position within the company. As long as you can show your employer how the degree or study will benefit them, they will assist you in the class fees.

Must remain with the employer – many employers will also include a stipulation that you must work for the company for a certain period of time after you receive tuition assistance from them – and if you don’t, you may have to pay back their investment in your education.

The employer wants to know their investment in your education is going to help them. They want to ensure you aren’t going to get your degree and then leave.

It’s important you talk with your employer and HR office to get the full guidelines of taking the assistance. In most cases, they are pretty simple, like the ones we’ve outlined above.

But each company is different, some of them might have stricter qualifications you have to meet in order to get the assistance and not have to pay back the tuition.

Related Post:  How to Pay Off Your Student Loans So You Can Get On With Your Life

Employer Tuition Assistance – What You Need to Know

If you didn’t know, college is expensive. VERY expensive. If your employer has a tuition assistance program, I highly recommend you take advantage of it.

If you’ve ever thought about going back to school (or going to school for the first time), as your HR department or employer if they would be willing to assist you in this journey. You might be surprised by the answer.


About Post Author

Get Instant Access
FREE Weekly Updates! Enter your information to join our mailing list.

About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

Reader Interactions

Comments

    Leave A Comment:

    Comments:

    About the comments on this site:

    These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

  1. 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.

  2. 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?

  3. 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.

  4. 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?

Load More Comments

The Military Wallet is a property of Three Creeks Media. Neither The Military Wallet nor Three Creeks Media are associated with or endorsed by the U.S. Departments of Defense or Veterans Affairs. The content on The Military Wallet is produced by Three Creeks Media, its partners, affiliates and contractors, any opinions or statements on The Military Wallet should not be attributed to the Dept. of Veterans Affairs, the Dept. of Defense or any governmental entity. If you have questions about Veteran programs offered through or by the Dept. of Veterans Affairs, please visit their website at va.gov. The content offered on The Military Wallet is for general informational purposes only and may not be relevant to any consumer’s specific situation, this content should not be construed as legal or financial advice. If you have questions of a specific nature consider consulting a financial professional, accountant or attorney to discuss. References to third-party products, rates and offers may change without notice.

Advertising Notice: The Military Wallet and Three Creeks Media, its parent and affiliate companies, may receive compensation through advertising placements on The Military Wallet; For any rankings or lists on this site, The Military Wallet may receive compensation from the companies being ranked and this compensation may affect how, where and in what order products and companies appear in the rankings and lists. If a ranking or list has a company noted to be a “partner” the indicated company is a corporate affiliate of The Military Wallet. No tables, rankings or lists are fully comprehensive and do not include all companies or available products.

Editorial Disclosure: Editorial content on The Military Wallet may include opinions. Any opinions are those of the author alone, and not those of an advertiser to the site nor of  The Military Wallet.