Naturally, most employee training occurs in-house. But area colleges and trade schools may also provide a great source of education in professional development. And if you reimburse employees for their education expenses at these institutions, you and your employees may be able to save valuable tax dollars.

Offer a Fringe Benefit
Payment of an employee’s expenses usually results in taxable wages subject to income and payroll taxes. However, reimbursements and direct payments of job-related education costs are excludable from workers’ wages as working condition fringe benefits. Furthermore, you can deduct these costs as employee education costs (as opposed to wages), so you don’t have to withhold income tax or pay payroll taxes on them.
To qualify as a working condition fringe benefit, the education expenses must be ones that employees would be allowed to deduct as a business expense if they’d paid them directly and weren’t reimbursed. Basically, this means the education must relate to the workers’ occupations and not qualify them for new jobs. There’s no ceiling on the amount your workers can receive tax-free, and you can classify education costs as not subject to payroll taxes if the IRS considers the expenses to be working condition fringe benefits.

Establish a Program
Another approach to reimbursing education costs in a tax-efficient manner is to establish a formal written educational assistance program. These programs can cover both job-related and non-job-related education. Assuming it meets eligibility requirements, such a program can allow employees to exclude from income up to $5,250 (or an unlimited amount if the education is job related) annually in education reimbursements for costs such as:

  • Undergraduate or graduate-level tuition,
  • Fees,
  • Books, and
  • Equipment and supplies.

The IRS, however, won’t allow reimbursement of materials that employees can keep after the courses end (except for textbooks). You can deduct up to $5,250 (or an unlimited amount if the education is job related) of education reimbursements as an employee benefit expense. And you don’t have to withhold income tax or pay payroll taxes on these reimbursements.

To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated workers, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available to workers.

Discover the Hidden Advantage
Another “hidden” advantage to reimbursing education costs is attracting new hires and retaining them. The labor markets in many industries are competitive right now, so it’s important not to overlook ways to differentiate yourself from other companies looking to hire from the same pool. Moreover, keeping an engaged, well-trained staff in place enables you to avoid constantly enduring the high costs of hiring.

Also bear in mind the “Millennial” perspective. Prospective employees between the ages of 18 and 35, so-called “Millennials,” make up a significant portion of the labor market now. This generation has its own distinctive traits and preferences toward working – one of which is a need for ongoing challenges and education, particularly when it comes to technology.

Keep Them On Board
If your company has employees who want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By reimbursing education costs as a fringe benefit or setting up an educational assistance program, you can keep your staff well trained and evolving toward the future and save taxes, too. Feel free to contact us about how to ensure you’ll enjoy the tax advantages of doing so.

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Greg Kenworthy
I am a partner at Hawkins Ash CPAs, focusing on the accounting and tax needs of privately held businesses and individuals. This includes tax return preparation, review, tax planning, research and financial statement compilation and review. Prior to and during my time at Hawkins Ash CPAs, I served two tours of duty with the Army in Iraq.

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