As students head back to school, employers should take note of some important implications for their business. Employees, with and without children, may be thinking about education and the upcoming school year.
What to consider and how to prepare:
Dependent care Flexible Spending Accounts (FSAs)
Employees with school-age children may need to pay for after-school care, and this may be pricey (depending on location and the nature of the care). Dependent care flexible spending accounts (FSAs) enable employees to pay this personal cost on a pre-tax basis. The annual contribution for 2022 is capped at $5,000 ($2,500 if married filing separately), but enrollment had to have been made during the open enrollment period (during an open enrollment period prior to the start of 2022 or some other period for new hires). The same dollar limit applies for 2023 (there’s no inflation adjustment, although Congress could increase the cap), and the open enrollment period will start October or November 2022, depending on the terms of the plan.
Employers may want to pay for this care, if they can afford it. In 2022, dependent care assistance up to $5,000 per employee is tax free to them. From the company perspective, the payments are not subject to payroll taxes and are fully deductible.
Note: Sole proprietors, partners, LLC members, and more-than-2% S corporation shareholders may not participate in FSAs; they’re not employees or, for S corporations, considered employees.
Time off to attend school activities
Employees may want time off to attend parent-teacher conferences, school plays, or athletic events. Determine what the rules are in your state. Currently 10 states—California, Colorado, Illinois, Louisiana, Massachusetts, Minnesota, Nevada, North Carolina, Rhode Island, and Vermont—and DC require certain private employers to give unpaid leave time for employees to attend their child’s school or daycare center. If you are in one of these states, check whether the law applies to you. For example, in California, only employers with 25 or more employees are subject to the law, but in D.C. all employers must give unpaid leave time (up to 24 hours in the year).
Two points to consider:
- If you have remote workers who are in these locations, you may be required to give them time off even if your business is located in a state without such a law.
- Whether or not you’re subject to the law, you may want to offer unpaid time off as a fringe benefit to demonstrate that the company cares about its employees. Of course, employees without children likely will want a comparable benefit.
Paying for employees’ education costs
One of the benefits that employees appreciate is career development, and that includes additional education. Paying for this, or at least contributing to it, can be a meaningful way to attract and retain valued employees. Consider:
- An educational assistance plan, which limits tax-free reimbursements to $5,250 per year. The courses need not be job-related. The plan must be in writing (there’s no IRS form for this), and owners and family may not be able to benefit from this.
- Working condition fringe benefits allows for unlimited reimbursement for education that would otherwise be deductible if the employees had paid for it themselves (and the itemized deduction for this were not suspended). In other words, the courses must be required by the company or the law to keep the job, salary, or status, or to maintain or improve skills needed for the present job.
Find more tax information from IRS Publication 970.
I have a quotation pinned to my monitor from Benjamin Franklin: “An investment in knowledge pays the best interest.”
Whatever small businesses can do to support education is certainly a plus.