Employee Tuition Reimbursement & Taxes

by Gerald Hanks; Updated September 26, 2017
Serious students sitting for an examination

An employer that offers tuition reimbursement allows its employees to further their educations while paying some or all of the employees' expenses. These programs allow the employees to extend their skills and increase their value, while providing the employers with highly skilled workers. The IRS has specific rules on how employers and employees report tuition reimbursement payments.

How Tuition Reimbursement Works

Employees must submit an application for tuition reimbursement before enrolling. The application shows the employer the institution the employee wants to attend, the classes the employee wants to take and how those classes will impact the employee's duties. The employer will often require that the employee maintain a specific grade point average to qualify for reimbursement. The tuition reimbursement agreement will also specify the time period for the reimbursement and any conditions that would require the employee to repay the reimbursed amount, such as termination of employment.

Employer Tax Benefits

The tuition reimbursement program allows employers to improve the quality of their workforce while reducing their overall tax burden. The IRS allows employers to deduct funds spent on tuition reimbursement from their taxable income. Employers can also exclude their tuition program reimbursements from an employee's wages if the employee enrolled in either undergraduate or graduate classes under the Qualifying Educational Assistance Program Exclusion. When companies understand how to apply tuition reimbursement programs effectively, they can use favorable tax policies to invest in their employees without reducing net profits.

Employee Tax Benefits

Aside from the educational benefits of a tuition reimbursement program, the employee also receives substantial tax benefits. The Education Working Condition Fringe Benefit Exclusion allows an employer to exclude the amount an employee receives in tuition reimbursement from that employee's taxable compensation on the year-end W-2 form. In effect, the tuition reimbursement becomes tax-free income for the employee, as long as that reimbursement amount satisfies the criteria as a deduction for the employer.

Rules and Limitations

Tuition reimbursement typically covers expenses such as tuition, books, enrollment fees and lab fees, but not room and board, food or travel expenses. The IRS limits the tuition reimbursement tax benefit to $5,250 per employee per year. The tax agency also requires employers to provide documentation to verify that their tuition reimbursement payments went toward employees attending classes relevant to their job classification and restricts the tax benefits of tuition reimbursement programs for non-employees, including volunteers and independent contractors.

About the Author

Living in Houston, Gerald Hanks has been a writer since 2008. He has contributed to several special-interest national publications. Before starting his writing career, Gerald was a web programmer and database developer for 12 years. He also started Story Into Screenplay, a screenwriting blog at www.StoryIntoScreenplay.com.

Photo Credits

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