Tuition Reimbursement: Tax Policies And Benefits

By Ronald Kimmons. May 7th 2016

When people gain a higher level of education and learn important skills, their ability to contribute to society becomes greater. For this reason, both companies and governments often provide programs that support the attainment of higher education. One such program that they may employ is tuition reimbursement. In the United States, various tax policies have been made that encourage working people to go back to school and encourage employers to [|]reimburse employee tuition[:|].

Basics Of Tuition Reimbursement

When a company adopts a tuition reimbursement policy, it essentially tells all of its employees that, if they enroll in qualifying educational programs, the company will help pay the tuition costs for those programs by reimbursing employees for part or all of what they spend. Unlike a [|]scholarship program[:|], a tuition reimbursement program does not require a complicated application process, and it is not rewarded only to a limited number of individuals. Rather, a tuition reimbursement program is available to all employees who meet certain criteria.

For instance, a company may require that employees receiving tuition reimbursement work full-time, have a certain amount of time with the company under their belts, agree to stay with the company for a minimum amount of time in the future, and enroll in certain types of courses. A company may be hesitant to help employees pay for degrees in literature or archaeology, but that company may be happy to help employees pay for graduate programs in business, engineering, or information technology.

See: Best Financial Aid For Graduate School

Employer Tax Benefits

For employers, the benefits of providing employees with tuition reimbursement are not limited to the employee’s increased ability to contribute to the company. To a certain extent, employers can deduct the money spent on tuition reimbursement from their [|]taxable income[:|]. While this is also true for normal worker wages, which are deducted as business expenses, normal worker wages do not usually lead directly to a more highly skilled workforce.

When companies work the numbers well, they can often use tuition reimbursement tax policies to invest in human capital without cutting net profits at all. However, there is a limit: as of the time this article was written, employers are generally limited to $5,250 per employee per year. Beyond that point, employers of course can still issue tuition reimbursements, but such reimbursements must meet special requirements to qualify as [|]tax deductions[:|].

Employee Tax Benefits

The tax benefits of tuition reimbursement are not limited to the employer. While the employee who receives a tuition reimbursement is essentially getting a pay raise, it is an untaxed pay raise. The amount an employee receives from an employer in this way is not even included in the “wage, tips, and other compensation” of his or her W2 form; it is a benefit that the Internal Revenue Service does not count as taxable income at all. As long as an employee’s reimbursement meets the criteria to be a deduction for the employer, it also meets the criteria to be untaxed income for the employee.

An Exception: Working Condition Fringe Benefits

While tuition reimbursement is limited to $5,250 per employee per year as a general rule, there are exceptions. If the tuition reimbursement can be counted as a [|]working condition fringe benefit[:|], it can exceed the $5,250 limit and still go untaxed. A working condition fringe benefit is anything that an employer gives to an employee expressly for the purpose of making the employee able to do his or her job.

For instance, if an employer provides a cellular telephone for an employee because it is an indispensable tool for everyday business, it is a working condition fringe benefit. When it comes to tuition reimbursement, if the education that the employee seeks is absolutely necessary when it comes to performing the employee’s fundamental duties, it counts as a working condition fringe benefits. For instance, tuition assistance for an EMBA program usually cannot exceed the limit and remain untaxed, but tuition assistance for a professional licensing or certification program usually can exceed the limit and remain untaxed.

See: The Tax Implications Of Employee Fringe Benefits

Course Limitations

Not every course of study can qualify for a tuition reimbursement. While reimbursements that stay below the limit do not have to apply specifically to the job of an employee, they do generally have to increase the employee’s job-related qualifications to some degree. For instance, tuition reimbursement for a foreign language program can usually count, regardless of one’s job. However, reimbursement for a class that is for a hobby or sport usually does not count unless it is part of a degree program or applies specifically to the employer’s business operations.

Expense Limitations

Tuition reimbursement can only be used to cover specific [|]education-related expenses[:|]. This means tuition, enrollment fees, and textbooks. It cannot be used to pay for food, lodging, clothing, vehicles, or other items, even if the expenses are incurred as a direct result of the educational course.

Bottom Line

The provision of tuition reimbursement is completely up to the employer. Some companies provide it, while others do not. Some companies may be willing to provide it, but do not make a practice of it because they do not have large numbers of student employees. If you are working and attending school, consider asking your employer for a tuition reimbursement. If you present a clear argument, laying out the benefits that you will bring to the company by gaining a higher level of education, your employer just might approve it.


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