Alfred University offers employees and their families the opportunity to purse higher education free of charge. This exceptional benefit is offered for both undergraduate and graduate coursework. While undergraduate tuition remission is generally not taxed for employees of education institutions, the Internal Revenue Service has ruled that the graduate tuition benefit is not excluded from the income of these employees. Employees who do not work for educational institutions are not eligible for the same income exclusion for undergraduate coursework as those that do.
In general, IRS regulations consider anything of value provided to an employee by an employer to be a form of compensation. All compensation must be reported as taxable wages and is subject to income tax withholding, unless specifically excluded by the IRS.
Under section 117(d) of the Internal Revenue Code, educational institutions offering a full reduction of tuition charges to employees, their spouses and dependent children for undergraduate coursework may exclude the value of this education from their employees’ taxable wages. The exclusion under this section does not extend to graduate coursework and only applies to employees of an educational institution.
Section 127 of the Code allows all employers, whether or not they are an educational institution, to provide their employees (not spouses or dependents) with educational assistance for both undergraduate and graduate work. Employers may provide each employee with up to $5,250 of educational assistance per year on a tax-free basis. The tuition remission benefit that the University offers employees not covered by the above exclusion is eligible for this exclusion.
Therefore, graduate-level tuition remission received by employees of educational institutions and all tuition remission received by those who are not employees of educational institutions is taxable once the value exceeds $5,250 per tax year. In addition, all tuition remission received by spouses and dependents of employees who are not employees of educational institutions is fully taxable (no $5,250 exclusion).The Internal Revenue Code requires that taxable tuition remission must be added to employees’ taxable wages and employment taxes must be withheld.
The additional taxable income and taxes withheld are reported on the W-2 form. The University is required to issue W-2 forms to employees by January 31st to provide the information necessary for completing their tax returns. Educational assistance in excess of the excludable amount is subject to federal, Social Security and Medicare taxes.
The following example illustrates how this process works for an employee of an educational institution who received $10,250 of graduate-level tuition remission during the tax year. It also illustrates how the process works for someone who is not an employee is an educational institution and who receives $10,250 of undergraduate-level tuition remission during the tax year.
Example: An employee who has received $10,250 in taxable tuition remission benefits would have $5,000 of additional taxable income reported in boxes 1, 3 and 5 of his/her W-2 ($10,250 tuition remission received less $5,250 exclusion) at the end of the year.
The table below shows where the taxable income and taxes withheld are reported on the W-2 Form.
|Type of Tax||W2 Taxable Wages||W2 Taxes Withheld||Percent|
|Federal Income Tax||Box 1 $5,000||Box 2 $1,100||22% Supplemental rate|
|Social Security||Box 3 $5,000||Box 4 $310||6.2% Up to the annual max|
|Medicare||Box 5 $5,000||Box 6 $72.50||1.45% unlimited|
|State Income Tax||Box 16 $5,000||Box 17 $322.50||6.45%|
The additional $1,805 in taxes ($1,100 federal + $310 Social Security + $72.50 Medicare + $322.50 state) due on the additional income must be withheld from the employee’s paychecks.
Each month, Payroll runs a report indicating the total dollar amount of tuition remission received by employees during the current tax year. The tax year is not tied to the academic year and includes all tuition remission applied to the student’s account for coursework taken in the current calendar year plus all tuition remission applied to the student’s account for coursework taken in a previous calendar year which was not used in the calculation of that previous year’s taxable income.
If the amount received by an employee exceeds the annual excludable amount ($5,250), the excess must be added to the employee’s taxable wages when the employee receives the benefit. The increase in taxable wages will increase the taxes withheld from your pay check and reduce your net pay.
To minimize the impact on your net pay, once Payroll determines that additional tax withholding is required, the additional taxes will be spread out evenly across the paychecks issued during the current academic quarter/semester. If you have already received one or more paychecks during the current academic quarter/semester, the additional taxes will be spread out across the remaining pay checks that you will receive during the quarter/semester. The following charts indicate which paychecks will be affected by the additional tax withholding.
|Spring||January, February, March, and April|
|Summer||May, June, July, and August|
|Fall||September, October, November, and December|
All employees are encouraged to track their tuition remission benefit for the year and plan accordingly. In addition, all employees are encouraged to verify that they have received tuition remission at the beginning of each academic term/semester to make sure that Payroll can spread their tax withholding over as many pay periods as possible.
The Tuition Remission Application is available on the Human Resources website and must be resubmitted each academic year by August 1st.
Who should I contact with questions regarding tuition remission?
What classes and charges make up the amount of tuition remission reported to Payroll? I do not agree with the amount reported to Payroll.
I am a graduate student. Are undergraduate-level courses counted toward the $5,250 annual exclusion?
I believe the graduate-level courses I am taking are related to my job and, therefore, qualify as a “working-condition fringe benefit”. Why can’t I be exempt from tax withholding on my graduate courses?
Can the University record the additional taxable income on my W-2 but not withhold any additional taxes? I will pay them myself when I file my return.
Why is the federal tax withholding rate so high? Can I change the withholding rate?
Why can’t Payroll estimate the amount of additional income I will incur and spread it across all of my paychecks for the entire year, reducing the amount of additional tax withheld from each check?
Why are the withholding amounts always higher at the end of the year, when I need money the most?
Who should I contact if I have taken classes but not received the tuition remission credit on my student account?