If you are one of those generous employers who provides educational scholarships to current employees and prospective employees, we strongly recommend that you evaluate whether you are appropriately taxing these benefits. When an individual hears the word “scholarship,” they frequently don’t think of this financial award as potentially having tax implications. However, for purposes of the Internal Revenue Code, there are very specific requirements in order for an employer-provided scholarship to avoid federal income tax.
Employers should ask themselves the following questions:
- Are you providing education scholarships to non-employees in exchange for the students committing to come work for you?
- Are you providing scholarships or tuition assistance to employees for education that qualifies the employee for a different job (e.g. a LPN is taking courses to become a RN)?
- Do you have a formal education assistance plan which outlines the eligibility parameters for employees to receive a scholarship or tuition assistance, and are you providing employees scholarships or tuition assistance that exceeds $5,250 in a calendar year?
If you answered yes to any of these questions, there is a good chance that your “scholarship” (or a portion of the scholarship) need to be treated as taxable income to the employee or prospective employee. The timing of this taxation and the implications for employers (e.g. withholding of taxes and payment of FICA taxes for employees v. issuance of Form 1099’s for non-employees) will depend on the structure of the education benefit being provided.
Needless to say, employers who provide educational scholarships or tuition assistance should consult with legal counsel to ensure that the benefit is structured in the most advantageous way and that it is being taxed appropriately. Otherwise, employers could find themselves being assessed a hefty tax penalty by the Internal Revenue Service.
Should you have questions or require further information, please contact Stephen W. Lyman at 317.977.1422 or slyman@wp.hallrender.com or your regular Hall Render attorney.
