The Tuition Fee Waiver Program is a fringe benefit and as such has strict reporting requirements established by the Internal Revenue Service [Internal Revenue Code Sections 117(d), 127 and 132(d)] and the State of California Controller’s Office. The reporting requirements state that the fringe benefit must be taxed in the calendar year in which the benefit was received.
Undergraduate-level coursework for employees is non-taxable.
Graduate/doctorate fees for employees are non-taxable if the total fees waived do
not exceed $5,250 in a calendar year.
Effective with the 2019 tax year, commencing with the spring 2019 academic term, all graduate/doctorate level courses taken by employees exceeding the $5,250 threshold will be taxable and withheld from the employee’s pay warrant. Employees may consult a personal tax advisor to determine if courses taken are job related pursuant to IRC Section 132(d) and submit the deduction on their personal tax return.
All graduate-level coursework taken by an employee's spouse, dependent child or domestic partner will be reported as imputed taxable income to the employee. Undergraduate-level coursework taken by an employee's domestic partner will also be considered imputed taxable income.
The table below summarizes taxable and non-taxable courses:
|Eligible Participant||Course Level||Tax Status|
Nontaxable up to $5,250
|Employee's Spouse/Dependent Child||Undergraduate
|Employee's Domestic Partner||Undergraduate
Calculation of Imputed Tax Value of Fee Waiver
The imputed income is reported to the State Controller's Office once a semester after enrollment census. There is no adverse tax reporting on imputed income when an employee or an employee’s dependent drops courses.
The additional tax withholdings are deducted from the employee’s first and second paychecks following this reporting.
The flat rate tax method is used to determine the amount of imputed tax an employee would be subject to if the cost of educational assistance (Fee Waiver) exceeds the IRS limit for employees, or if the cost of educational assistance for dependents, spouse, or registered domestic partner is subject to taxation. The flat rate tax is comprised of:
• Federal Tax (currently 22%);
• State Tax (currently 6.6%);
• Social Security Tax (6.2%) (if the employee is subject to this tax on normal wages); and
• Medicare Tax (1.45%) (if the employee is subject to this tax on normal wages).
Currently, the flat tax rate is 36.25%; and may be adjusted annually.
The flat tax calculation of the taxed portion of fee waiver benefits is as follows:
Value of Fee Waiver X Flat Tax Rate = Flat Tax Amount Deducted from Employees’ Wages
Example: Fees in excess of $5,250 were calculated at $3,500. (Total Value of the Fee Waiver in this example is $8,750.)
Total Fees = $3,500
Flat Tax Rate = 36.25%
Calculation of Imputed Tax Value = $1,268.75
The value of the fee waiver in excess of the Section 127 threshold is fully taxable; therefore, the flat tax calculated in the example, $1,268.75, will be withheld from the employee’s pay warrant. The tax withheld for fee waiver is in addition to any other taxes the employee is subject to have withheld from the pay warrant.