It can sometimes be difficult to understand how your employer pays for your education with little or no cost to you. Here are a few frequently asked questions that should help explain the tax implications of education benefits provided by an employer under a Section 127 educational assistance program.
Q: What is the federal limit an employer can pay towards your education without there being tax implications?
A: According to the IRS, an employee can exclude from gross income up to $5,250 annually in employer-provided educational assistance benefits. Qualifying educational assistance payments include tuition, fees, and similar expenses, books, supplies, and equipment. Your employer might offer more or less than $5,250 – if they offer more, continue reading!
Q: What happens if I receive more than $5,250 in educational benefits in a year?
A: If your total tuition and other educational benefits exceed this amount within the year, the excess is generally considered additional taxable wages, subject to the same tax withholding and other rules applicable to wage income.
Q: What is a “tax gross-up” and how would it affect the taxation of educational benefits in excess of $5,250?
A: In some cases, an employer might offer its employees a “tax gross-up,” which is an additional salary payment that results in the employee receiving the same net pay as if taxes had not been withheld on the excess funds beyond the $5,250 for your educational benefits.
These are just general tax rules and principles and may vary depending on your own individual financial and tax situation. Your best bet is to speak with a tax professional who can help you understand (in dollars and cents) what this might mean for you so that you can best plan and prepare for it!
To learn more about Section 127 educational assistance programs and the tax consequences of education benefits generally, you can visit the IRS website on Tax Benefits for Education. You can also contact your company’s payroll department.
If you would like more information on your company’s policy, feel free to Contact A Coach so that we can get you connected with the right team!