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.
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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.
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.
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?
So my job decided to send my tuition reimbursement straight to my loan company as a payment on my school loans. Now I know that tuition reimbursement totaling over $5250.00 within a year has to be taxed as income. If they take income taxes out on this can they still send it straight to the loan company? I guess Im not understanding how they can do this because its being classified as income but I dont receive it as income. Any thoughts on this would greatly help me.
Abdul Awan says
I received tuition assistance benefit from my employer. In Spring I registered for two courses and the employer paid $6400 to my institution against my $8000 limit. I then dropped the courses and the institution refunded the employer back full amount. Later in Fall I again registered for two courses and the employer paid $6400. Later I got a latter from the employer that my Taxable tuition is $ 7550 ($12,800- $5250 IRS Deduction Limit. I asked them that even though received the full refund how come the total tuition amount is $12,800. They said that calculating the taxable tuition it does not matter if they got the refund . Is it true?
Ryan Guina says
Abdul, it sounds to me like it was a clerical error on their part. I would contact the HR department and ask them if they can issue you another form stating the value of the college courses you actually took, versus the initial form they sent. You could also consult with a tax professional to ask for advice regarding how to handle this. Best of luck!
Try reading the Publication 970 Tax Benefits for Education and Publication 15-B. It is a bit convoluted, if you do not understand it, or do not want to waste time, contact a tax professional. From what I read, yes they are deductible if you did not get reimbursed for them, transportation to school is also deductible. Of course, I am not a tax professional, so either read it yourself or contact one.
John Thomas says
My employeer paid my tuition directly ($6060 per the 1098-T). All classes were considered job related for tax purposes. Should I just ignore the 1098-T I received when I file my taxes? I have other expenses – travel, parking, books, etc. can those be deducted?
John, I recommend speaking with a tax professional for your specific situation. Best of luck.
It would be very helpful to spell out what makes educational expenses a working condition fringe benefit:
1. Education is not a minimum requirement for keeping or getting you current job.
2. Education does not qualify you for a new trade or business (e.g. an Engineer getting an MBA qualifies the person for a ton of other jobs, hence usually it is not tax deductible, or the IRS will try to argue that).
3. Education should improve or maintain your current skill set and benefit your current job.
Also, deducting it as a business expense on your tax return might trigger an audit, make sure you keep your documentation straight, and you do qualify under the three conditions above.