Tuition Reimbursement & Tax Write-Offs For Companies
Companies are eligible to write off salaries and other forms of compensation that employees take advantage of by meeting certain criteria. These other forms of compensation commonly include fringe benefits, such as tuition reimbursement programs. If you set up a tuition reimbursement program in a certain way, you can reduce the amount of employment taxes your company pays every year.
In order to write off all employee compensation – which includes tuition reimbursements that don't qualify for an exclusion – the amount for each employee must be reasonable and paid in exchange for the provision of services. Determining whether an employee's compensation is reasonable requires consideration of various factors, such as the compensation package an employee could obtain from other employers, the demand for skills they possess and the level of complexity and responsibility that their position entails, for example. If the Internal Revenue Service ever concludes that the total salary and tuition reimbursements an employee receives is excessive, your company can only write off the amount that is deemed reasonable.
Fringe benefits cover many of the non-cash compensation that companies offer employees in addition to salary, such as free daycare, merchandise or service discounts and tuition reimbursements for those who enroll in school, for example. Generally, fringe benefits are taxable to employees just like wages are, but companies, however, can write off their costs regardless of the tax consequences to employees. When it comes to tuition reimbursement programs, however, companies can reduce the amount they pay in employment taxes by taking advantage of the “educational assistance program” exclusion. Essentially, if you're able to eliminate the tuition from an employee's taxable compensation, the company doesn't have to pay Social Security, Medicare and federal unemployment taxes on the reimbursement since it isn't treated as taxable compensation.
Implementing a tuition reimbursement policy that satisfies the IRS's criteria of an educational assistance program allows you to exclude up to $5,250 of reimbursements per year from the W-2 of each employee. To qualify, your company's tuition reimbursement policy must be a written plan that outlines all eligibility requirements, doesn't favor highly compensated employees and doesn't provide more than 5 percent of the annual reimbursements to owners. Moreover, employees must have notice of the program but cannot have the option of taking alternative taxable benefits in lieu of a tuition reimbursement.
Given the high cost of education, your company may provide reimbursements in excess of $5,250. You can still write off the excess if the reimbursement meets the reasonableness requirement. However, if the courses an employee takes are closely related to their job function, a second exclusion for “working condition benefits” may apply that can increase your company's employment tax savings. In the context of education, tuition is a working condition benefit if the cost is deductible to the employee as an unreimbursed job expense. For example, if the courses train an employee on sophisticated software systems that the company uses, the tuition would be deductible to the employee. Therefore, it qualifies as a working condition benefit.