- The IRS defines a fringe benefit as anything of value you provide your employees above and beyond ordinary cash compensation. Moreover, the agency requires employers to include all fringe benefits in the employee's taxable wages by listing the benefit amounts on a W-2. However, the tax law provides numerous exclusions to this general rule, one of which covers the tuition reimbursement programs that employers provide pursuant to an eligible educational assistance program.
- In order to exclude the tuition reimbursement from the employee's taxable income, in addition to the amount not exceeding $5,250, the IRS requires that the employer provide the reimbursement pursuant to an educational assistance program. This is a written plan that provides tuition reimbursements to employees. The program must not favor highly compensated employees and not be discriminatory in its eligibility requirements. Additionally, a maximum of 5 percent of the employer's annual tuition reimbursements can be for owners or shareholders of the business and employees must not be given the option of alternative compensation in lieu of the reimbursement. Lastly, the employer must publicize the educational program to all employees who are eligible to participate.
- The IRS doesn't prohibit companies from providing employees with reimbursement that exceeds $5,250; however, any reimbursement that exceeds this limitation is taxable to the employee. This means that when the employee fills out a tax return, she will pay tax on the excess reimbursement as if it were ordinary salary and wages. In addition to the income tax, the excess is also subject to Social Security, Medicare and federal unemployment taxes, which may result in higher amounts withheld from the employee's paycheck. However, employees who attend school part time may be eligible for the lifetime learning credit, which can reduce their tax bill on a dollar-for-dollar basis. If you qualify for the credit, you can include the cost of tuition that exceeds the $5,250 in the credit calculation.
- An employer who provides tuition reimbursement is able to claim a business expense deduction for the entire reimbursement, regardless of whether it exceeds $5,250, since fringe benefits are always deductible. The classification for purposes of the employee's taxes has no effect on the employer. However, if some of the reimbursement is taxable to the employee, it will increase the amount of Social Security and Medicare tax the employer must contribute. This is because all employers are responsible for paying half of each employee's employment taxes.
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