Corporate Tax question - IRS Code 127

[mistertate]

Pelicans,

does anyone understand IRS Code 127 for Employee Tuition Assistance programs?
My understanding is the that there is a $5250 right off.

I think the employee gets to subtract up to $5250 from annual earnings for tuition expenses paid by the company?
What is the benefit to the company? Is their tax less because the employee reports less earnings?

Thanks,

[MBAtarga]

The IRS limits the amount of tuition that employers can reimburse tax-free each year. For the 2018 tax year, the limit is $5,250. If your tuition reimbursement is $5,250 or less, your employer should not include it on your W2 and you do not have to pay taxes on it.

As stated above, any amount of tuition reimbursement that exceeds $5,250 is considered a fringe benefit of the job, and the employee will have to pay taxes on that amount.

Edit: The "benefit" to the company is it could attract good talent, and many companies require the employee benefiting to stay at the company for 24 months after receiving the benefit, so employee retention is increased as well.

[Bob Kontak]

Originally Posted by mistertate

What is the benefit to the company? Is their tax less because the employee reports less earnings?

I have not studied the code. What Mark says makes logical sense.

I have to assume the company can deduct the tuition reimbursements as a business expense up to the $5,250 even though the employee's income is shielded from the tax impact. It's an enticement benefit provided by the gub-ment to trigger investment/interest in education.

Beyond $5,250 the company still claims this expense with the employee shouldering the income tax through income. Still not a bad gig.

[RWebb]

call the IRS help line and ask

- document the call

great way to reduce or eliminate penalties if you make a mistake (you'll still be on the hook for payback with interest tho)

[MBAtarga]

My explanation for the "benefit" to the company is from personal experience. I got my MBA through a tuition paid employer benefit. They provided up to $5250/year, and the university had a program that ran about 22 months - starting 3Q in year 1, with graduation in 2Q in year 3. Since there were 3 calendar years - tuition was reimbursed at $15,750. The Dean from the school commented during the program overview, that the company knew we would be retained for at least the next 2 years of the program itself, then for another following year after graduation, as we would have to repay the tuition if we left earlier. Have any idea how much it costs to hire an experienced person in high tech these days - and for one that is "guaranteed" to stick around for 3 years?