IRS Materials: Education for Employees

Education Expenses

If you pay or reimburse education expenses for an employee enrolled in a course not required for the job or not otherwise related to the job, deduct the payment as wages. You must include the payment in the employee's income, and it is subject to FICA and FUTA taxes and income tax withholding. However, if the payment is part of a qualified educational assistance program, these rules may not apply. See chapter 5.

If you pay or reimburse education expenses for an employee enrolled in a job-related course, you can deduct the payment as a noncompensatory business expense. Since this expense would be deductible if paid by the employee, it is called a working condition fringe benefit. Do not include a working condition fringe benefit in an employee's income.

Educational Assistance

This section provides basic tax information about educational assistance programs.

Deducting the cost. You can deduct the cost of an educational assistance program on the "employee benefit programs" line of your business income tax return.

Exclusion from wages. You can exclude a limited amount of the cost of providing educational assistance through an educational assistance program to an employee from his or her wages as you withhold, pay, and report employment taxes.

Exclusion limit. You can exclude from an employee's wages up to $5,250 of the cost of providing educational assistance during the year.

Payments over the limit. If your educational assistance program pays or incurs more than $5,250 for an employee's benefit, treat part or all of the excess as:

1.A working condition fringe benefit (see chapter 4), or 2.Additional income to the employee.

Expiration date. This exclusion will not apply to expenses paid with respect to courses beginning after May 31, 2000.

Educational assistance program. An educational assistance program is a separate written plan of an employer that meets all of the following requirements.

1.It benefits employees who qualify under rules set up by you which do not favor highly compensated employees (defined in chapter 4) or their dependents. To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a collective bargaining agreement, if there is evidence that educational assistance was a subject of good-faith bargaining. 2.It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. 3.It does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. 4.You give reasonable notice of the plan to eligible employees.

Your plan can cover former employees if their former employment is the reason for the coverage.

Educational assistance defined. Educational assistance means amounts you pay or incur for your employees' education expenses. These expenses generally include the cost of books, equipment, fees, supplies, and tuition. However, these expenses do not include the cost of graduate-level courses beginning after June 30, 1996. (The prohibited graduate-level course is of a kind normally taken by a person pursuing a program leading to an advanced academic or professional degree.) Also, these expenses do not include the cost of a course or other education involving:

òGames, òHobbies, or òSports.

These expenses do not include the cost of items that your employee is allowed to keep at the end of the course, such as:

òEquipment, òSupplies (other than textbooks), and òTools.

Nor do they include the cost of lodging, meals, or transportation.

Employment taxes. The amount you exclude from an employee's wages is not subject to social security, Medicare, and federal unemployment taxes, or income tax withholding.

Working Condition Fringe

You can exclude from your employee's gross income (as a working condition fringe benefit) the value of property or services you provide if the employee could deduct them as a trade or business, or depreciation expense if he or she paid for them.

Educational assistance. To qualify as a working condition fringe, the cost of the education must be a job-related deductible expense by your employee. For more information on deductible education expenses, see Publication 508, Educational Expenses.