Tuition Remission Taxes
Cabrini University offers employees the opportunity to pursue higher education free of charge.
This exceptional benefit is offered for both undergraduate and graduate coursework.
While undergraduate tuition remission is generally not taxed, the Internal Revenue Service (IRS) has ruled that the graduate tuition benefit is taxable income.
When is tuition remission taxed?
In general, IRS regulations consider anything of value provided to an employee by an employer to be a form of compensation.
All compensation must be reported as taxable wages and is subject to income tax withholding, unless specifically excluded by the IRS.
Section 127 of the IRS code allows all employers, whether or not they are an educational institution, to provide their employees with educational assistance for both undergraduate and graduate work.
Employers may provide each employee with up to $5,250 of educational assistance per year on a federal tax-free basis.
The tuition remission that Cabrini offers employees for graduate-level education is eligible for this exclusion. However, the exclusion does not extend to Pennsylvania State Withholding Tax. It is also not applicable to spouses and dependents of employees.
The Graduate tuition remission benefit that is used by an employee's spouse or dependent is fully taxable for both federal and PA state taxes.
What happens to the taxes that are withheld?
The additional taxable income and taxes withheld are reported on the W-2 form.
Cabrini is required to issue W-2 forms to employees by Jan. 31 to provide the information necessary for completing their tax returns.
Educational assistance in excess of the excludable amount is subject to federal, Social Security, and Medicare taxes.
The following information shows how the taxable tuition remission and taxes are reported on the W-2 Form for a tuition benefit worth $5,000 over the $5,250 exclusion.
- Federal Income Tax
W-2 Taxable Wages: $5,000 (Box 1)
W-2 Taxes Withheld: $1,250 (Box 2)
Percent: 25% - Supplemental Rate
- Social Security
W-2 Taxable Wages: $5,000 (Box 3)
W-2 Taxes Withheld: $310 (Box 4)
Percent: 6.2% - Up to $7,347 per year
W-2 Taxable Wages: $5,000 (Box 5)
W-2 Taxes Withheld: $72.50 (Box 6)
Percent: 1.45% - Unlimited
- Total Federal Tax
W-2 Taxes Withheld: $1,632.50
Note: Pennsylvania State Withholding Tax does not provide an exclusion, and your graduate tuition benefit value will be taxed in its entirety at the applicable rate, currently 3.07%.
Example: An employee who has received $10,250 in tuition remission benefits for graduate-level coursework would have $5,000 of additional taxable income reported in boxes 1, 3, and 5 of his/her W-2 ($10,250 tuition remission received less $5,250 exclusion) at the end of the year.
Federal income tax withheld for the year (reported in box 2) would be $1,250 ($5,000 additional taxable wages * 25% withholding rate) more than the amount withheld against wages alone.
Social Security tax withheld for the year (reported in box 4) would be $310 ($5,000 additional taxable wages * 6.2% tax rate) more than the amount withheld against wages alone, and Medicare tax withheld for the year (reported in box 6) would be $72.50 ($5,000 additional taxable wages * 1.45% tax rate) more than the amount withheld against wages alone.
The additional $1,632.50 in taxes ($1,250 federal + $310 Social Security + $72.50 Medicare) due on the additional income must be withheld from the employee’s paychecks.
When are the taxes withheld from employees’ paychecks?
To minimize the impact of this additional income tax withholding, the additional income will be divided and taxed over five pays each semester, beginning after the add/drop period ends.
All employees are encouraged to track their tuition remission benefit for the year and plan accordingly.
In addition, all employees are encouraged to sign up for tuition remission at the beginning of the academic period in order to spread their tax withholding over as many pay periods as possible.
Why are the withholding amounts always higher at the end of the year, when I need money the most?
Tuition remission you receive at the beginning of the year is not taxed under the $5,250 exclusion.
When you exceed that amount, every dollar of the graduate-level tuition remission benefit is taxable.
If you are taking graduate courses throughout the year, this means that the additional income and additional taxes will always occur in the latter part of the year.
Employees receiving this taxable benefit should plan accordingly for the decrease in net pay that will occur when the additional taxes are withheld.
Why is the federal tax withholding rate so high? Can I change the withholding rate?
Income earned in addition to (supplemental) your regular salary is subject to the highest tax rate that you pay.
The IRS defines a flat supplemental tax withholding rate to be used for income over and above an employee’s regular salary, which is pegged to the middle tax rate of the IRS graduated tax tables. This is currently set at 25%.
I believe the graduate-level courses I am taking are related to my job, and therefore, qualify as a “working-condition fringe benefit.”
Why can’t I be exempt from tax withholding on my graduate courses?
The IRS’ position is that the value of job-related graduate tuition reductions and/or waivers by colleges and universities do not qualify as working condition fringe benefits because the tax treatment of this item is addressed elsewhere in the tax code [e.g. § 117(d) or § 127](FSA 200231016, Aug. 2, 2002, IRS Office of Chief Counsel).
For this reason, Cabrini may not exclude the value of the graduate tuition reduction or waiver in excess of the $5,250 limit from your gross income.