Taxability of Employee Tuition Benefits
ON THIS PAGE:
- State Tuition Benefit Taxability
- Federal Tuition Benefit Taxability
- Viewing and Calculating Your Witholding Calculations
Tuition Benefits can be taxable at the federal and/or state level, depending upon a number of factors.
Undergraduate tuition benefits are generally not subject to withholding for employees using the tuition benefit for themselves at the federal level. State taxability of undergraduate tuition benefits is determined by your state of residence.
Graduate tuition benefits for employees using the benefit for themselves are taxable at the federal and local level once you exceed $5,250 in graduate benefits for the calendar year. State taxability of graduate benefits is determined by your state of residence.
The following information provides a summary of how our office handles withholding, but does not attempt to supersede the Division of Human Resources Policy 406 nor does it affect any agreements made by the employee with the Division of Human Resources through tuition benefit payment requests in the Online Tuition Benefit Management System. It’s important to review the official policies before using the benefit at www.hr.upenn.edu/PennHR/benefits-pay/tuition. Benefits are subject to change as are regulations governing the taxability of tuition benefits.
State Tuition Benefit Taxability
If you are a resident of New Jersey, any tuition benefits you receive at the undergraduate or graduate level at Penn are subject to withholding at the state level. The Tuition Benefit Office will withhold the state tax at a pre-determined set rate from the benefit payment our office makes to your student account.
In other words, Tuition Benefit Office will report the amount of tuition benefit you receive for any terms within a calendar year (January to December) on your W2 as state income for that calendar year (simply added to your personal salary). It will also withhold the appropriate state tax from your tuition benefit payment to cover the tax on your behalf. This deduction from your benefit amount will be re-routed and paid as tax on your behalf, and will show up on your W2 in the state “tax paid” box.
Penn is paying the tax from the benefit, offering a loan that you “pay back” by paying the balance on your student account. The gross tuition amount and tax withheld are reported to the IRS as a part of your earnings. You as the taxpayer are responsible for making appropriate payroll withholding adjustments, if desired, and for settling your tax liability on year-end tax filing. The income and taxes paid are recorded for the calendar year in which the term(s) reside for which you received the benefit (regardless of the date payment was received).
Federal Tuition Benefit Taxability
The benefit covers 100% of the tuition, technology fee and general fee for up to two course units per term and two over the entire Summer for credit courses offered by Penn. As long as you are enrolling in credit courses, the benefit will cover them as outlined above, regardless of the program in which you are enrolled. While the program's classification does not affect your benefit coverage, it affects your out-of-pocket costs due to the taxability of graduate tuition benefits. The program classification determines whether we will treat your benefit as taxable income.
If your program is classified as a graduate-level program (even if you were to enroll on a non-degree/non-matric basis or even if you are enrolling in undergraduate courses through it), the benefit is subject to federal and local withholding at roughly 36% once you exceed $5,250 in benefits for the calendar year (January to December). This means that approximately 36% from each benefit dollar that you receive over $5,250 for the calendar year is re-routed (from the 100% two course unit gross benefit) to cover the taxes on your behalf, which then leaves a balance on your student account to cover by the billing due date.
Under current law*, graduate tuition benefits for faculty and staff are subject to federal income tax, FICA (Social Security tax), Medicare tax and city wage tax to the extent that the benefits exceed $5,250 per calendar year. This means that you can receive up to $5,250 in tuition benefits for each calendar year tax-free. Tuition benefit payments that exceed $5,250 in the calendar year are subject to withholding at approximately 36%.
Any applicable taxes are withheld directly from your benefit and the remaining amount (net benefit) is awarded to you as the scholarship. In other words, Penn is covering your tuition charges per the benefit plan (gross benefit), but is deducting the taxes from your benefit (offering you a loan from the benefit), so nothing is altered in your actual paycheck.
After the Tuition Benefit Office has made the payment of the net benefit to your student account, you’ll have a balance left on your account which will include the amount withheld for taxes, in addition to any other fees or charges that aren’t covered by the benefit. By paying the balance on your student account, you are essentially “paying back” the loan Penn gave you that covered your tax withholding.
The gross tuition amount which is subject to taxes, is reported to the IRS as a part of your earnings and will appear on your W2 simply added to your personal salary. The taxes withheld from the benefit are also paid to the government and are reported on your W2 as taxes paid. Our office withholds using a set tax rate; if your personal rate is lower, you may receive some of what our office withholds back when you file, although the addition of the tuition benefit to your income could place you into a higher tax bracket which could affect your withholding expectations on your personal salary. You as the taxpayer are responsible for making any payroll withholding adjustments, if desired, and settling your tax liability at year-end filing. The income and taxes paid are recorded for the calendar year in which the term(s) reside for which you received the benefit (regardless of the date payment was received).
Viewing and Calculating Your Witholding Calculations
After requesting payment of the benefit, you can return to your benefit account generally the next day (as long as charges are already on your student account) to view the amount withheld for taxes and the amount of your net benefit that will be paid to your student account.
To calculate your withholding, you’ll need to know what your program’s tuition, technology, and general fees are for the term and whether you have already used up your full $5,250 exemption for the year. The following chart is an example of how to do the calculations on your own.
You may be able to recover some of the taxes withheld if you’re eligible to deduct the cost of graduate education from your gross income as a job-related business expense. The IRS ruling that applies to the eligibility of education expenses as a business expense can be found at www.irs.ustreas.gov/pub/irs-pdf/p970.pdf. Review IRS publication #970, specifically chapters 11 and 12, to see if you qualify. If you feel your education may qualify, you can speak with a tax professional about recovering the taxes our office withholds when you file.
We understand that the taxes can be significant and urge anyone concerned about this to speak with Student Financial Services about payment options including loans and information on payment deadlines.
Tuition + General Fee (for 2 course units) = Gross Benefit
Gross Benefit - $5,250.00 Exemption (once per calendar year) = Amount subject to withholding
Tax rate (36.37% for non-resident) x Amount subject to withholding = Withholding
Gross Benefit – Withholding = Net Benefit which is paid to your student account