Employer Student Loan Repayment - CARES Act

[Opus 17]

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@jzlthssw wrote:

I was thinking the same - but Turbotax Business will "routinely" move it to the "employee wages and salaries" category - the "standard", pre-COVID, place, which will cause a mismatch with the W-2. Shouldn't TurboTax 2020 know the CARES Acts Section 127 deduction is an anomaly? Thanks!

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I don't use the program, I can't answer that.  Tuition reimbursement up to $5250 is a tax-free benefit.  Can you list the loan payment in the place where you would list tuition?  It's the same section of the tax law.  If tax-free tuition payments are getting moved to wages, I can't explain that.

However, remember that the overall $5250 limit still applies, tuition and loan payments aren't covered by different limits.

@Hal_Al @DoninGA @pk do you know anything about this behavior?

[Hal_Al]

No, I don't know enough about TT Business to give a definitive answer.

That said, I don't think the business wage expense deduction has to match  the sole employee's W-2.  Second, if TT puts it there, that's most likely the right place.

[jeff4130]

If the employer loan repayment was issued directly to me, and I did not use it on student loans, will I get penalized for that? 

[Opus 17]

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@jeff4130 wrote:

If the employer loan repayment was issued directly to me, and I did not use it on student loans, will I get penalized for that? 

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It would be considered part of your taxable income and should be included on your W-2 wages and subject to social security and Medicare withholding.  There is no other specific penalty for you, however, your employer could be subject to penalties if they are audited, for failing to use proper controls on the loan program and issuing you an improper non-taxable payment.  You should contact the employer, explain that you did not use the funds as promised, and ask for a corrected W-2 that includes the money as wages. 

[Jane-Doe]

This is for anyone that took an extension on their 2020 taxes while struggling to figure out what to do with the Section 127 Exemption. After waiting for over an hour and a half and on a call with the IRS agent for almost two hours, this is what I was advised if you are self-employed. This note does not address Section 127 exemptions for any business entity. First, look at Pub 15-b. The Pub 15-b for 2021 (https://www.irs.gov/publications/p15b#en_US_2021_publink[phone number removed]) fixes the confusion by specifically covering sole proprietors. It also covers some partners, so check out the publication. 

First you have to adhere to the requirements, i.e. meet the definition, write out an educational assistance plan, etc. Second, Section 127 is an exemption, i.e. the specified amount of wages are not taxed and thus not counted on your taxes as income. It is NOT a deduction. You do not write off the $5,200 loan payment as an educational or business expense. Instead, you deduct the amount of student loans paid, up to $5,200 to the extent you still have income.  This can be tricky with issued 1099s which will reflect a different amount. Thus, I was advised to document the deduction. I'd say it's a good idea to document the payments as coming from the business account, whether to the lender directly each month or to yourself for payment if you have a separate business account and transfer funds into a personal account. The last part is just my personal thoughts to demonstrate transparency should an issue arise. If you qualify and take the student interest deduction, you can only deduct the principal under Section 127. 

If you have a business where you are paying educational assistance to employees, as a sole proprietor, you would deduct those funds as expenses under the employee benefit item on the Schedule C - I looked it up and believe it's line 14. 

As I said above, this is for self-employment and sole proprietors only. I am not a tax professional and I cannot state that the advice I was provided by the IRS in accurate or complete or that I accurately understood and communicated what was explained to me. Take the above information at your own risk. I am merely passing along the information it took me months to obtain. Good luck!

[auspiciouschi]

Hello,

I work in a Public Entity which is a Housing Authority in WA. Can my employer qualify to assist pay some of my students loan as part of benefits?

Thank you,

Cherie

[Opus 17]

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@auspiciouschi wrote:

Hello,

I work in a Public Entity which is a Housing Authority in WA. Can my employer qualify to assist pay some of my students loan as part of benefits?

Thank you,

Cherie

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That's a question for the business and their tax advisors.  As mentioned, the business must have some kind of tuition benefit plan in place that meets all the normal IRS regulations.

The easiest way is if a business already has a tuition plan—such a plan can pay qualifying employees up to $5250 per year for tuition reimbursement and have it be tax free.  If they already have such a plan, it's not too hard to extend it to include loan repayment, if they want to.  But it must apply to all eligible employees, not just selected employees.

If no tuition plan is in place, they would have to set one up first.  

The business can also give you money outside of a qualified plan to help you with expenses, but that has to be treated like any other taxable bonus, and be included with your wages for income and social security taxes.