Use Your Business Entity to Create a Tax-Free Educational Assistance Program
July 13, 2017
We all know the cost of higher education is skyrocketing. We want to give you a tax strategy that will work for your kids who are age 21 and older. They may be entering MBA programs, law school, or medical school. Or, perhaps your child is entering college later in life.
Did you know your business could pay up to $5,250 per year for educational assistance? It can, and it's simply wonderful. This education assistance is deductible to your business as a normal and necessary business expense. This means tax savings for you and at the same time, the assistance is a non-taxable fringe benefit to your employees, including your adult children who work for you. An educational assistance program pays for typical things such as tuition, fees, books, and supplies. It does not cover meals, lodging, and transportation.
Educational Assistance Program Questions
Kaiser Tax is often asked if educational assistance needs to relate to your business. That’s another wonderful part of this program: No, it does not. Let's say you own a retail store and your daughter is going to medical school. Under a qualified educational assistance program, your company can pay $5,250 per year for her medical schooling. The educational assistance program allows you to pay for classes that have nothing to do with your business.
Kaiser Tax also gets asked how many hours per year does a child need to work in your business to be eligible for this benefit. The good news is the Internal Revenue Code does not require your child to work a certain number of hours before they can become eligible. This means your child can work for you part time and still be eligible for this benefit.
Educational Assistance Program Requirements
This all might sound too good to be true. You hire your kids, you pay them to work for you, and you get to pay $5,250 tax-free for education. You must think there are some requirements or pitfalls, and you are correct. There are some.
At the company level, educational assistance is a qualified plan. There must be a written plan that spells out the benefit and who is eligible. The benefit must be offered to all “eligible” employees. You must consider the number of employees who might be eligible and what the potential costs may be to offer assistance to all of them.
If that cost is still favorable, there are several important requirements regarding your kids. Your child must be 21 years or older and a legitimate employee of your business. They cannot be more than a 5 percent owner of your business, and they cannot be your dependent for tax purposes. That's why these programs work best for children who are a little older and on their own.
If you can jump through these hoops, an educational assistance program is a great way to help your kids with higher education costs in the most tax-favored way possible. While this is a great strategy to help with the education costs for your kids, remember that everybody loves tax-free benefits. An educational assistance program is a wonderful recruitment and retention tool for other employees. To get help on your business’s educational assistance program, contact Kaiser Tax today.