Estimated Read Time: 3 minutes –

Educational Benefits and Hire-Your-Child Tax Planning Strategies

Education expenses are valid business expenses. And there are employers who offer employees educational benefits for continuing education, maintaining professional licenses, gaining new skills and credentials, and having additional degrees that would benefit both the employee and employer. The hire-your-child strategy also gives you savings in a tax smart fashion even if you employ your children who are over age 18.

Which of these educational benefits are deductible to employees?

There are some fringe benefits that are allowed by the IRS to be excluded from employee pay and taxes. There’s no need to withhold federal income tax and FICA tax for Social Security and Medicare (for both the employee and employer contribution)

The IRS allows some fringe benefits to be excluded from employee pay and taxes. For all of the non-taxable benefits (which includes educational assistance), there’s no need for you to withhold federal income tax and FICA tax for Social Security and Medicare (for both the employee and employer part). These non-taxable educational benefits aren’t subject to federal unemployment (FUTA) tax.

There are rules and some qualifications that must be met for these expenses to be totally deducted to your business.

  1. Exclusion of up to $5,250 of benefits each year including expenses for books, tuition, and travel costs (to and from school). Anything over this said amount is taxable to the employee.
  2. There must be a written Educational Assistance Program given the following restrictions: a. the plan does not favor highly paid employees, b. the program should not provide more than 5% of benefits to the company owners and shareholders (even to their dependents and spouses), c. no cash should be given in lieu of the educational assistance, d. there must be a reasonable notice of the program to qualified employees.
  3. The company must be able to justify that the educational benefit is related to the business. And there has to be records that would substantiate the claims.
  4. The company owners and partners in the business can also avail of the educational assistance program. Current employees, former employees (who retired, were laid-off, or left on a disability), or leased employees who were hired on a full-time basis for at least a year, are also eligible to be included in the company’s educational assistance program.

Which of these educational benefits are deductible to your business?

For the cost of continuing education to be included in the business expenses, the following restrictions must be met:

  1. The educational course must not: a. need to meet the minimum educational requirements of the employee’s current job, b. qualifies the employee for a new or different business or trade.
  2. For the purpose of this benefit, the independent contractors providing services in your business can be treated as employees who exclude allowable education benefit expense payments from income.

Working Condition Fringe Benefits

Providing employees with working condition fringe benefits is another way of making educational benefits non-taxable. This is applicable for businesses that do not have educational assistance plan or those who provide education assistance amounting to more than $5,250 per year.

Working condition fringe benefits must be:

  • The required course must be an employer’s bona fide business purpose that is required by the employer or by law in order for the employee to keep his current salary, status, or job.
  • The education aims to enhance the skills needed by the employee for his job.

Self-Employed Business Owners’ Education Expenses

Subject to some limitations, education expenses can be deducted by self-employed business owners just like with any individual taxpayer. In order for these expenses to be deductible, the education must prove that it sustains or enhances the skills needed in your present work and it is a requisite by law or regulations for upholding a license to practice, status, or job. Costs for continuing education can be deducted by professionals.

On the other hand, education expenses are not deductible if the needed education aims to meet the minimum educational requirements of the present business or trade (i.e. the cost of obtaining a license to practice is not considered deductible if the person doesn’t hold such license yet). The education expense is also not deductible if the program of study aims to qualify for a new business or trade.

Feel free to reach out to our Credo team advisors if you have questions regarding hire-your-child tax strategy and the tax deductions when it comes to educational benefits.