Reviewed 10/1/2014
Scope
This guideline addresses the tax reporting requirements applicable to graduate-level educational assistance provided by the University to employees. A separate guideline covers educational assistance provided to employees’ relatives. Educational assistance includes tuition waivers and tuition remission. Payroll Tax Guideline 110 summarizes the Internal Revenue Code provisions applicable to employee tuition waivers and remissions.
Educational Assistance Tax Form
All non job-related graduate-level educational assistance provided to employees by the University must be promptly reported to the Campus Payroll Office.
General Rule
The University may exclude from an employee’s gross wages $5,250 of educational assistance each year, regardless of whether the courses are graduate-level, undergraduate level, job-related or non-job-related. If the value of educational assistance exceeds the annual $5,250 limit, the excess value attributable to graduate-level courses is excludible only if the courses are job-related. If the excess value is attributable to non-job-related graduate-level courses, the excess value is taxable wages to the employee, must be included in federal gross wages on the employee’s Form W-2, and is subject to payroll tax withholding. The authority for this rule is the Economic Growth and Tax Relief Reconciliation Act of 2001. The Campus Payroll Office is required to coordinate the necessary payroll tax withholding and reporting.
Graduate-level educational assistance provided to University teaching and research assistants generally does not result in taxable income if the tuition waiver or remission is not a payment for employment services. Campuses should review agreements with research assistants and teaching assistants and make any necessary revisions to ensure that tuition remission and tuition waivers that represent scholarships are not misconstrued as taxable wages.
Job-Related Tests
If the two part job-related test is satisfied and documented, graduate level courses taken by employees qualify for exclusion from income. Acceptable documentation would include a form or memorandum signed by the employee’s supervisor.
The job-related tests are not satisfied unless both of the following tests are met.
First the educational assistance must meet one of the following requirements:
- The education must maintain or improve skills required by the employee in his/her job.
Example: Michaela, a general practitioner of medicine, takes a two-week course reviewing new developments in several specialized fields of medicine. Michaela’s employer pays for the course. The expenses for the course are not taxable and will not be reported on her Form W-2 because the course maintains or improves skills required by her in her trade or business and does not qualify her for a new trade or business. (Adapted from Reg. §1.162-5(b)(3)(ii), Example (3)) - The education must meet the express requirements of the University imposed as a condition of retaining the job. Please note, the requirement must have a bona fide business purpose, and only the minimum education necessary for retention of employment, status or salary may be considered as undertaken to meet the employer’s requirement.
Example: Brian works for an employer administering grants and contracts. In order to maintain his job, the employee is required by his employer to take courses each year that review new regulations affecting grants and contracts. The course work is considered qualifying education, meaning the employer-paid courses will not be reported on his Form W-2. Second, the educational assistance must meet both of the following requirements: - The education cannot constitute a minimum educational requirement to qualify for obtaining employment.
Example: John, who has completed two years of a normal three-year course leading to a bachelor of laws degree (LL.B.), is hired by a law firm to do legal research and perform other functions on a full-time basis. As a condition of continued employment, John is required to obtain an LL.B. and pass the State bar examination. John completes his law school education by attending night school, and takes a bar review course in order to prepare for the State bar examination. The law courses and the bar review course constitute education to meet the minimum educational requirements for qualification in John’s trade or business and, thus, any employer-paid expenditures for such courses are taxable and would be reported on his Form W-2. (Adapted from Reg. §1.162-5(b)(2)(iii), Example (3)) - The education cannot lead to qualifying the individual for a new trade or business. Please note, a change in duties does not constitute a new trade or business if the new duties involve the same general work as is involved in the employee’s present work.
Example: Susan is an employee practicing a profession other than law (e.g., engineering, accounting, etc.) for an employer. The employer requires her to obtain a law degree. Susan intends to continue practicing her non-legal profession for the employer. Nevertheless, the employer-paid expenditures for Susan to attend law school are taxable and would be reported on her Form W-2 because the course of study qualifies her for a new trade or business. (Adapted from Reg. §1.162-5(b)(3)(ii), Example (2))