Is It Taxable Income if My Employer Pays My Tuition?

Employer-paid tuition and tax free employer provided assistance is a great benefit for many individuals. For 2018, the exclusionary amount is $5,250. Once that amount is exceeded, the excess becomes taxable income to you, although that’s not the case if the overage is considered a working-condition fringe benefit. There is no income limit for eligibility for employer-paid or employer-reimbursed tuition and education tax deductions, and the employee does not need to seek a degree or enroll in school full time.

The IRS defines a working-condition fringe benefit as “a benefit which, had you paid for it, you could deduct as an employee business expense.” For working-condition fringe benefit eligibility for education, each class must qualify individually. It’s more than a job-related course, although that is part of it. One of two requirements must be met:

• Maintenance and improvement of the employee’s skills in his or her present job        
  
• The classes are required by law, are regulatory requirements, or the employer mandates the requirement. The education must involve a legitimate business purpose for the employer. This includes courses necessary to maintain professional standing for the employee to remain in the present position or earn the same salary.
  

Any education required to meet the minimum standards in the job the employee currently holds does not qualify as a working-condition fringe benefit. However, if the minimum requirements change after the employee is hired, education used to meet the new minimums does qualify as a working-condition fringe benefit. Any classes taken for a purpose outside of the employee’s field does not qualify as a working-condition fringe benefit.

Employers can deduct the entire amount of educational assistance provided to employees on their taxes, as long as they meet the IRS qualified educational assistance programs standards and, thus, qualify as education tax deductions. Not every form of schooling qualifies as an educational assistance program. Your employer must have a written plan, and that plan cannot favor highly compensated employees. For 2017, highly compensated employees are those earning more than $120,000 or who owned at least 5 percent of the business during the year or the one preceding it.

Qualified expenses under such plans are not limited to tuition but also include books, fees, necessary supplies and equipment. Nonqualified expenses include any tools that the employee may keep after the education course is over. Any related meals, travel or lodging also does not qualify.

Keep in mind that the IRS considers employer-paid tuition as a type of financial aid. It could reduce your eligibility to receive other sorts of financial aid, especially needs-based grants and loans. This holds true even if you don't receive reimbursement until the academic term is complete.

If you worked for more than one employer during the year and received educational benefits from more than one party, the nontaxable amount remains at $5,250. You can’t claim the excluded amount for other educational or tax credit deductions. The IRS doesn’t allow double-dipping.

If your employer paid less than the annual exclusion for you in tuition, you don’t have to report it on your income tax form, and it doesn’t appear on your W-2 form. If the tuition amount exceeded the limit, you should find the taxable portion included as income in Box 1 of the W-2.