Page 12 - Employers Tax Guide to Fringe Benefits

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
the services are performed under your primary direc- $200 (the amount in excess of the nontaxable assis-
tion or control. tance), and applicable taxes should be withheld on that
• Yourself (if you’re a sole proprietor). amount.
• A partner who performs services for a partnership. Educational Assistance

Exclusion from wages. You can exclude the value of
benefits you provide to an employee under a dependent This exclusion applies to educational assistance you pro-
care assistance program from the employee's wages if vide to employees under an educational assistance pro-
you reasonably believe that the employee can exclude the gram. The exclusion also applies to graduate-level cour-
benefits from gross income. ses.
An employee can generally exclude from gross income
Educational assistance means amounts you pay or in-
up to $5,000 of benefits received under a dependent care cur for your employees' education expenses. These ex-
assistance program each year. This limit is reduced to
$2,500 for married employees filing separate returns. penses generally include the cost of books, equipment,
fees, supplies, and tuition. However, these expenses
However, the exclusion can't be more than the smaller
of the earned income of either the employee or employ- don't include the cost of a course or other education in-
volving sports, games, or hobbies, unless the education:
ee's spouse. Special rules apply to determine the earned
income of a spouse who is either a student or not able to • Has a reasonable relationship to your business, or
care for himself or herself. For more information on the • Is required as part of a degree program.
earned income limit, see Pub. 503.
Exception for highly compensated employees. Education expenses don't include the cost of tools or
You can't exclude dependent care assistance from the supplies (other than textbooks) your employee is allowed
wages of a highly compensated employee unless the ben- to keep at the end of the course. Nor do they include the
efits provided under the program don't favor highly com- cost of lodging, meals, or transportation. Your employee
pensated employees and the program meets the require- must be able to provide substantiation to you that the edu-
ments described in section 129(d) of the Internal Revenue cational assistance provided was used for qualifying edu-
Code. cation expenses.
For this exclusion, a highly compensated employee for Educational assistance program. An educational as-
2020 is an employee who meets either of the following sistance program is a separate written plan that provides
tests. educational assistance only to your employees. The pro-
1. The employee was a 5% owner at any time during the gram qualifies only if all of the following tests are met.
year or the preceding year. • The program benefits employees who qualify under
2. The employee received more than $125,000 in pay rules set up by you that don't favor highly compensa-
for the preceding year. ted employees. To determine whether your program
You can choose to ignore test (2) if the employee wasn't meets this test, don't consider employees excluded
from your program who are covered by a collective
also in the top 20% of employees when ranked by pay for bargaining agreement if there is evidence that educa-
the preceding year. tional assistance was a subject of good-faith bargain-

Form W-2. Report the value of all dependent care assis- ing.
tance you provide to an employee under a dependent • The program doesn't provide more than 5% of its ben-
care assistance program in box 10 of the employee's efits during the year for shareholders or owners (or
Form W-2. Include any amounts you can't exclude from their spouses or dependents). A shareholder or owner
the employee's wages in boxes 1, 3, and 5. Report in is someone who owns (on any day of the year) more
box 10 both the nontaxable portion of assistance (up to than 5% of the stock or of the capital or profits interest
$5,000) and any assistance above that amount that is tax- of your business.
able to the employee. • The program doesn't allow employees to choose to
Example. Oak Co. provides a dependent care assis- receive cash or other benefits that must be included in
tance FSA to its employees through a cafeteria plan. In gross income instead of educational assistance.
addition, it provides occasional on-site dependent care to • You give reasonable notice of the program to eligible
its employees at no cost. Emily, an employee of Oak Co., employees.
had $4,500 deducted from her pay for the dependent care
FSA. In addition, Emily used the on-site dependent care Your program can cover former employees if their employ-
several times. The fair market value of the on-site care ment is the reason for the coverage.
was $700. Emily's Form W-2 should report $5,200 of de- For this exclusion, a highly compensated employee for
pendent care assistance in box 10 ($4,500 FSA plus $700 2020 is an employee who meets either of the following
on-site dependent care). Boxes 1, 3, and 5 should include tests.
1. The employee was a 5% owner at any time during the
year or the preceding year.

Page 10 Publication 15-B (2020)