Tax Benefit For Employer-Provided Educational Assistance

"Tax Benefit For Employer-Provided Educational Assistance" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 25th July 2011

According to the National Center of Educational Statistics, the average employer contributes around $3,000 toward tuition. Tax law states that $5,250 can be contributed tax free up to 2010 for the benefit of employees. Thus tuition reimbursement reduces your business's tax liability while increasing the ability to retain and promote employees.

Educational assistance benefits include payments by the employer for tuition, fees, and similar expenses, books, supplies, and equipment. It does not include payments for meals, lodging, transportation, or tools or supplies (other than textbooks) that you can keep after completing the course of instruction. Qualified education expenses include employer-provided education assistance for graduate-level course.

Many employers provide employees with tax-free education benefits. If you receive educational assistance benefits from your employer, the IRS allows you to exclude them from taxable earnings up to the IRS maximum allowable amount. The exemption applies to both undergraduate and graduate level courses and, subject to certain exceptions, does not have to be for work-related courses. The two most common are scholarships and grants under IRC section 117 and education-assistance programs under section 127. There is, however, a third alternative: CPAs can recommend using the working condition fringe benefit of IRC section 132(d).

According to the National Center of Educational Statistics, the average employer contributes around $3,000 toward tuition. Tax law states that $5,250 can be contributed tax free up to 2010 for the benefit of employees. Thus tuition reimbursement reduces your business's tax liability while increasing the ability to retain and promote employees.

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include those benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. This also means that you do not have to include the benefits on your income tax return.

Educational assistance benefits do not include payments for the following items:

  1. Meals, lodging, or transportation.
  2. Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
  3. Courses involving sports, games, or hobbies unless they:
    • Have a reasonable relationship to the business of your employer, or
    • Are required as part of a degree program.

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