Is your business in need of more skilled workers, but not sure how you’d hire them without drastically dropping your net revenue? We get that. Business is competitive and securing the right talent can be costly. At Fusion CPA, we have seen a trend around this with our vast clientele. But, while you may be plowing all your efforts into searching for the perfect skills, you may be overlooking a strategic solution right at your fingertips… The option of investing in education programs to upskill your existing employees!
Not only does this bridge the skills gap, it also nurtures loyalty among your workforce. The cherry on top? The potential for valuable tax breaks.
Understanding employer-paid education expenses and tax breaks
Now that we have your attention, let’s kick off with the basics. The IRS grants tax benefits for education that allow employers to provide tax-free reimbursements for qualified education expenses. What’s considered qualified? Education that is either required by the employer or mandated by law to keep an employee’s current job or enhance their skills for the role.
Educational assistance plans
According to the Section 127 educational assistance program employers can offer up to $5,250 in annual tax-free reimbursements per participating employee. The beauty of it? The employer can deduct the costs without facing federal payroll taxes. Yes, this program covers a wide array of educational expenses, including graduate coursework, offering flexibility for both employers and employees. And then exempts you from paying tax on spending that money.
Additionally, as a bonus, a recent legislative move in 2020 extended federal-income-tax-free treatment for payments made by employer-sponsored Section 127 educational assistance plans to include student loan debts of participating employees. This means that both educational improvements and student loans are covered. The benefit runs through December 31, 2025, but note that the annual limit is $5,250 for a combination of education expenses and student loan payments.
It’s essential to distinguish between employer educational assistance and tuition reimbursement.
- Educational assistance: Covers a broader range of expenses, including tuition, fees, books, supplies, and student loan repayments.
- Tuition reimbursement: Usually focuses on tuition and related expenses for courses taken while employed. It typically doesn’t extend to other ancillary costs like supplies, or student loan repayments.
Whether you’re aiming for a comprehensive approach or a more targeted tuition-focused strategy, understanding the options empowers both employers and employees to make informed decisions when exploring educational support options.