Fall is back-to-school time for both children and adults. While schools are figuring out how to open and operate during COVID-19, businesses and employees may be thinking of ways to pay for higher education and continuing education. As a general rule, the cost of this education can be pricey, even for online programs. Fortunately, the tax law provides certain key education-related breaks to help manage the cost.
Here’s a summary of the various breaks you might consider—personally or through your business.
Employer-paid learning
If the business pays part or all of the cost of continuing education or other courses for employees, this may be a tax-free fringe benefit. And the business can fully deduct the payments.
- If courses are job-related, there is no dollar limit on the tax-free perk. Job-related expenses include, for example, a continuing education course in the employee’s field of work.
- If courses are not job-related so that employees are free to pursue almost any higher education courses, the exclusion of this benefit from taxable compensation is limited to $5,250 per year. The company must adopt an educational assistance plan and no more than 5% of benefits under the plan can be used for highly compensated employees, such as owners and top executives. In a business with only a handful of employees, this type of plan may be impractical because owners and their families who work for the business cannot effectively benefit from it.
Idea: If the education costs are tax free to employees, they are also exempt from payroll taxes. This means the business can offer a benefit that is fully deductible and saves 7.65% in FICA taxes that would otherwise be due if additional compensation were paid to employees to enable them to pursue their education.
Idea: For 2020 only, employers with an educational assistance plan can pay employees’ student loans up to the annual cap ($5,250). Congress may extend this provision.
Education credits
Even if the business does not cover education expenses, employees may qualify for a personal tax credit on their income tax returns. The credits relate only to qualified higher education expenses.
- American opportunity credit up to $2,500. Of this amount, 40% is refundable so it can be claimed in excess of tax due.
- Lifetime learning credit of up to $2,000.
Note: The credit is partially or fully phased out when income is above a certain threshold.
Higher education deduction
If income is too high to claim an education credit, an employee may still be able to deduct up to $4,000 of tuition and fees for higher education as an adjustment to gross income (no itemizing is required). Here, too, there are income limits that may bar the use of this break, which is set to expire at the end of 2020 unless Congress extends it.
Workplace training
There are a variety of areas that require companies to train employees in the best practices. These include:
- Anti-sexual harassment training
- Diversity training
- Safety training (including COVID-19-related practices)
The training for these areas can be covered through online courses, enabling employees to take them at optimum times. There are also virtual reality (VR) options for certain situations. For example, Verizon trains its store employees in robbery preparedness using VR.
Self-employed individuals
If you don’t have a company to pay for your continuing education because you’re self-employed, you can do it yourself. While you can’t use an educational assistance program, the personal credits and other deduction discussed earlier may be applicable to you. Or you can deduct your business-related courses as a business expense. For example, you’re a Schedule C filer and take a continuing education course to maintain your professional license. The cost is a deduction that reduces your net earnings from self-employment. This cuts your income taxes as well as reducing your self-employment tax.
Final thought
The quotation taped to my computer screen from Benjamin Franklin reads: “An investment in knowledge pays the best interest.”
Helping employees manage the high cost of education can be a win-win for the company and staff.
To learn more about education tax breaks, see IRS Publication 970, Tax Benefits for Education.
