The Current Tax Status of Employer Education Assistance Page: 1 of 2
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Order Code 97-243 EPW
Updated January 14, 2005
CRS Report for Congress
Received through the CRS Web
The Current Tax Status of
Employer Education Assistance
Linda Levine and Bob Lyke
Domestic Social Policy Division
Section 127 of the Internal Revenue Code allows up to $5,250 in tuition
reimbursements and other forms of employer education assistance (e.g., books, supplies,
and equipment) to be exempt from income and employment taxes even if the education
does not qualify as a deductible business expense. The Economic Growth and Tax
Relief Reconciliation Act of 2001 (P.L. 107-16) reinstated the exclusion for graduate-
level courses that begin after December 31, 2001. As with many other provisions in that
legislation, the exclusion is extended only through December 31, 2010.
Taxable Employer Education Assistance
Except as discussed below, education assistance from employers generally must be
included in employees' gross income for federal income tax purposes. The amount is
reported on the W-2 statement that employees receive each January. Employers typically
increase withholding for the additional income taxes employees owe. The assistance also
is subject to Social Security and Medicare taxes, for which withholding is increased as
well, and to unemployment taxes paid only by employers.
Deductible Business Expense
Education assistance from employers can be tax-exempt if the education meets
Internal Revenue Service (IRS) tests for a deductible business expense. Essentially, these
tests require that the education be job-related but not enable one to meet minimum
requirements for current work or prepare for a new career. The tests consist of four
questions displayed on the flow chart below.' Employer tuition reimbursements can be
excluded from employees' gross income if the education meets the IRS tests and they are
provided through an accountable plan (i.e., employees are required to substantiate
reimbursements to their employer and return any excess payments). If an accountable
plan does not exist, the assistance is included in employees' gross income; however,
Congressional Research Service V The Library of Congress
IRS regulations 1.162-5. For additional information, see Your Federal Income Tax (IRS
publication 17) and Tax Benefits for Education (publication 970).
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The Current Tax Status of Employer Education Assistance, report, January 14, 2005; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc817294/m1/1/: accessed November 15, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.