Why some job-related training counts as taxable income to employees
Posted August 30, 2016
By Ed Zalewski, editor, J. J. Keller & Associates, Inc.
Nearly every new hire requires some training. Most training occurs on the job and involves the “how to” of job duties, such as learning how to use a computer program or operate certain equipment. Some employers even send employees to courses offered by third-party providers for specialized training, and the employer usually pays the course fees.
In addition, many employers help employees obtain higher education, even if the degree program is unrelated to the employee’s current job. These programs help develop a well-rounded workforce and can help employees prepare for advancement. Unless a tuition reimbursement program meets certain requirements, however, the payment counts as taxable income to the employee.
This raises a question: Why don’t the fees for job-related training courses count as taxable income to the employee?
Working condition benefits
The Internal Revenue Service (IRS) provides an exclusion from taxable income for the cost of job-related training, called a “working condition benefit.” Reimbursement for travel expenses related to such training may also be excluded from taxable income.
To qualify as a working condition benefit, the education must meet at least one of the following tests:
- The education is required by the employer or by law for the employee to keep his or her present salary, status, or job and must serve a bona fide business purpose.
- The education maintains or improves skills needed in the job.
Even if the education meets one or both of those tests, the costs would count as taxable income if the education:
- Is needed to meet the minimum educational requirements of the employee’s present trade or business, or
- Is part of a program of study that will qualify the employee for a new trade or business.
For example, an accountant could take a course on accounting practices as a working condition benefit. However, if an administrative assistant wanted to transfer to an accounting position but did not possess the required accounting degree, the cost for helping the employee obtain the degree would count as taxable income — unless the costs could be excluded under a tuition assistance program.
The IRS allows employers to offer up to $5,250 of educational assistance per year without counting that payment as income. The payment must be made under a written plan that provides assistance only to employees. The program cannot discriminate in favor of highly compensated employees or shareholders, and it cannot allow employees to choose cash instead of educational assistance. In addition, employees must be given reasonable notice of the program.
If the employer does not have an educational assistance plan (or if it provides assistance exceeding $5,250 per year), the payment (or the amount in excess of $5,250) must be counted as wages — unless the education qualifies as a working condition benefit. The IRS requires that each course in a degree program be evaluated individually under the working condition benefit criteria.
For example, an employee in a degree program would normally be limited to tax-free assistance at the IRS reimbursement levels. However, if the employee attends a course that is related to his or her current position, the cost for that course might be excludable from income (and from the IRS reimbursement limit) as a working condition benefit. A careful examination of the courses selected might allow employers to provide more than $5,250 per year in tax-free educational assistance.
About the author:
Ed Zalewski is an editor at J. J. Keller & Associates, Inc., a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law topics such as the Fair Labor Standards Act, employee benefits, and discrimination and harassment. He is the author of J. J. Keller’s FLSA Essentials guidance manual and BottomLine Benefits & Compensation newsletter. For more information, visit www.jjkeller.com/hr and www.prospera.com.