August and September…the time when the school year begins for children. But it’s also a time to think about how you can help your employees further their education and training. It’s been reported that retention rates rise 30% to 50% for companies with strong learning cultures. Tax breaks may support your efforts.
On-site training and mentoring
Employers may offer various learning opportunities in the workplace. These may be for soft skills, such as improving communication or learning to handle conflict.
Some states, such as California, Connecticut, Delaware, Illinois, Maine, New York, require sexual harassment training. A number of other states, including Colorado, Florida, Hawaii, Iowa, Maryland, Massachusetts, Michigan, Ohio, Oklahoma, Rhode Island, Tennessee, Utah, and Vermont, Wisconsin, encourage employers to do this training. Employers in still other states may need to provide this training as a condition of their insurance coverage.
Employers may also offer various learning opportunities in the workplace for hard skills (e.g., training on new software or machinery). They can reduce costs by paying for group training at the company’s location.
From an employee perspective, on-site training is just part of the job; they don’t have any additional compensation. From the employer perspective, the cost of on-site training is deductible.
Paying for higher education
You aren’t required by law to provide any education support to employees, but increasingly companies are doing so. From a tax perspective, there are two options:
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- An educational assistance program. You may set up a formal written plan to provide tax-free funds to employees for college or graduate school up to $5,250 annually (this amount is not adjusted each year for inflation). The funds may be used for tuition and fees, books, equipment, and supplies. The plan must be nondiscriminatory (i.e., may not favor owners and their family members working for the company). And you must provide notice about the plan to employees.
- A working condition fringe benefit. If the education or training maintains or improves an employee’s job skills or meets requirements to maintain his or her position, there there’s no dollar limit on what can be paid on a tax-free basis. The payments may cover tuition and fees, books and supplies, and certain transportation and travel costs.
Whether the benefit is paid under an educational assistance program or is treated as a working condition fringe benefit, because it is tax free to the employees, it is not subject to payroll taxes. However, payments under an educational assistance program in excess of the annual limit are not tax free to the employee—and are subject to payroll taxes—unless they can be viewed as a working condition fringe benefit. Whether tax free or taxable to the employee, the company deducts its payments.
The payments may be given to the employee who uses the money for education expenses or made directly to the educational institution. An employer may require that the employee receive a specific grade (e.g., at least a B) as a condition of the benefit.
Covering the cost of continuing education
Many jobs and professions require ongoing education to maintain licenses and certifications. Continuing education courses may be in person or online. There may be some free opportunities, but generally there are costs for these courses. Usually, the continuing education courses are treated as a working condition fringe benefit (see above) or as paid under an educational assistance program if there is one. In any event, employers may deduct their costs.
Caution: If employees pursue continuing education during regular work hours, they must be paid their usual compensation, according to an opinion letter from the Department of Labor. However, the opinion goes on to say that employers may adopt policies preventing employees from doing continuing education on company time, which can mean they don’t have to compensate them.
Helping with student loans
If your company has an educational assistance program (described above), you may pay up to $5,250 each year toward an employee’s student loan repayments. You may give the funds to the employee to be used for loan repayment or pay the lender directly. Again, this loan repayment assistance is a tax-free fringe benefit to the employee and not subject to payroll taxes. The business may deduct the payments.
The IRS ruled privately that employers may make a matching contribution to a 401(k) plan on behalf of employees who make student loan repayment of a specific percentage of their compensation. The employer contribution is made even though the employee doesn’t put money into their 401(k) account.
What education and training you decide to pay for depends, of course, on your company budget, your employee needs, and your staffing goals. Discuss the tax implications of your decision with your CPA or other tax adviser.