Maximizing Tax Breaks for Employer-Paid Education Expenses

Employer discussing tax breaks and education assistance with employee

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.

How to become a participating employer

To sign up for an employer educational assistance program and offer these benefits to your employees, you’ll typically follow a series of steps. Here’s a general guide:

1. Check for specific eligibility requirements.

Most businesses, regardless of size, can offer these programs, but it’s essential to check for any specific requirements.

2. Consult with legal, finance and HR professionals.

Before implementing any new employee benefits program, it’s advisable to consult with the relevant professionals for guidance on compliance with relevant regulations.

3. Design a formal education assistance policy.

Document the benefits you intend to offer. Clearly define eligible expenses, participant eligibility criteria, reimbursement limits, and any other relevant terms and conditions.

4. Ensure compliance with IRS guidelines. 

Ensure that the program does not favor highly compensated employees and that the benefits provided fall within the allowed annual exclusion limit. 

5. Consult with your CPA when making tax submissions

To avoid errors and incorrect reporting, it is beneficial to consult with a CPA to ensure that your program is compliant. Justifying educational expenses means that you need to have accurate records of all eligible expenses. This will help avert potential tax implications for both the employer and employees.

Because the process may vary based on the specific regulations in your jurisdiction and your business’s unique circumstances, consulting with your CPA is crucial for the smooth implementation of this program.

At Fusion, we have years of experience helping individuals and businesses submit compliant tax returns. Our CPAs are experienced with NetSuite and take pride in impeccable recordkeeping. From handling multi-state taxes to navigating successful tax credit applications. We stay informed when it comes to tax laws. Contact us for assistance today! 

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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.