Employer Student Loan Repayment - CARES Act

[sveltekitten]

With the new CARES Act, employers can pay up to $5,250 toward student loans and this amount is tax free to the employee.

Hypothetically, if this amount is paid direct to the employee (taxes and retirement are also taken out of the lump bonus) and the employee takes $5,250 and pays that to the loan, can the employee then deduct that amount on their taxes when they file 2020? Or is this supposed to be paid out a different way?

Thanks!

[SusanY1 · Accepted solution]

The employer would need to make the payment specifically for the purpose of student loan payment to qualify for this new provision.

Speak to your employer about the potential to redirect bonuses to your student loan instead of a general cash payment - they may be willing to do this for you as the benefit reduces payroll tax for your employer as well.

It would be a win-win for you both! 

[Opus 17 · Accepted solution]

In your scenario, it is not a tax-free payment and the employer is not using the CARES provision correctly, it is simply a taxable bonus that is included on your W-2 and you pay tax on.  In that case, since you paid your loans with after-tax money, you can use the student loan interest deduction.  But that scenario does not use the LRAP provisions of the CARES act.

There are two typical ways that an LRAP can be applied, as far as I can see.

For employees in certain public service jobs, the employer provides a loan to the employee that is used to pay the student loan payments.  If the employee meets the employment conditions, the loan is forgiven by the employer and the forgiven loan is not counted as taxable income (as forgiven loans usually are). 

For employees not in qualified public service jobs, the employer makes a payment directly to the lender.  The value of those payments is added to the employee's W-2 as taxable income, and since it is taxable, the employee can use the student loan interest deduction.

The CARES act makes employer loan assistance paid from March 27 through December 31, 2020, a tax-free employee benefit up to $5250 (combined maximum for tuition assistance and loan assistance). The payment does not have to be directly to the lender, but the employer does have to follow all the normal rules for educational assistance plans (such as, they must have a written plan, must notify all eligible employees of the existence of the benefit, and must offer the fringe benefit to all eligible employees).  

Assuming your employer has, or creates, an educational assistance plan that covers employee tuition and/or student loan payments, that is fair and complies with all the rules and regulations for employee educational assistance plans, then any payments made to you for the payment of your loans would not be included in your W-2 taxable wages and would not be counted toward social security or retirement match.  Then, you can't deduct any part of your student loan interest that was paid with tax-free assistance.  (For example, if you paid $500 per month in student loan payments ($6000 per year), and $5250 was tax-free assistance, then you could only deduct 12.5% of your interest for the year.)

If your employer does not already have an educational assistance program, they may want to work with a fringe benefit specialist or consultant to set up a program that conforms to the proper rules and regulations, so you and the employer don't get hit with unexpected penalties. 

[Anonymous]

How would a one person s-corp utilize this cares act provision of the S-corp paid the s-corp owners student loan debt? 

How would this be listed on the 1120S?

How would this be listed on 1040?

[Opus 17]

An S-Corp can provide section 127 education assistance to the owner and it is not subject to the limits on certain other fringe benefits provided to majority owners.  You can provide up to $5250 of education assistance to the employee, this normally includes tuition but for 2020 can include student loan payment assistance.  You would list this as an employee fringe benefit in the corporate tax return.  TurboTax should know the difference between fringe benefits that are subject to the special rules for owners and other fringe benefits that are not subject to those special rules.  The loan repayment is not included on the W-2 of the employee or reported on the employee’s tax return.   

[Anonymous]

Thank you.  In this case, would the s-corp owner/officer need to be on a W-2 for some portion of 2020 for this deduction to work?  If so, can this been applied to an off cycle payroll at year end?

Is the 5250 considered a Payroll tax deduction ?

Does this deduction work if the payroll taxes are deferred unto 2021 because of cares act?

[Opus 17]

The owner of an S-corporation must ALWAYS be paid a salary that is considered fair compensation for work performed.  This salary is subject to state and federal income tax withholding, social security and medicare tax, and any other state or federal requirements (such as worker's comp and unemployment).   (I suppose if you have several other employees and the owner is only an investor, then the owner does not need a salary, but then the non-salaried owner can't get tuition or other employee benefits.)

Taking the business profits as dividend or capital gains income without paying employment taxes is the number 1 adverse audit finding for small businesses.  

You can pay the salary weekly or monthly or even just once a year, but it must be fair compensation for the work actually performed during the year, similar to what you would pay an employee for the same work, and not just a token amount to "look good" for the IRS.  And the S-corp must file the proper W-2 and W-3 and form 941 or 944 plus the corresponding state forms for your state. 

[Eastassignor]

How about someone that is self-employed (either LLC disregarded entity or not) and files a Schedule C? Can they use the provision to pay student loans and reduce income?

[Opus 17]

Not as a disregarded entity.  You are not an employee. 

[Eastassignor]

Section 127(c)(2) defines an employee as anyone qualifying under Section 401(c)(1). Section 401(c)(1) says: "The term “employee” includes, for any taxable year, an individual who is a self-employed individual for such taxable year." Am I missing something?

[Opus 17]

Section (b)(2) and (b)(3) would seem to disqualify you since you are more than a 5% owner.  

Section (b)(3) might allow you to participate if you had other employees and offered them the tuition benefit as part of their benefits package.  For example, if you had two employees who received the maximum benefit of $5250 each, you might be able to take a benefit of $550 (so that your benefit was 5% or less of the total program benefit of $11050).  

If you do think you are eligible, I have no idea how to show this on schedule C.  

[Eastassignor]

Perfect - that was what I was missing.  Thanks.  But wouldn't that impact a S-corp as well?

[jzlthssw]

Opus 17: Sir - Your answers were extremely thoughtful, but missed the key part of the original question: WHERE on TURBOTAX Business (or Form 1120S) should I input the $5250 deduction? Thank you.

[Opus 17]

If you were filing a tax return for an S Corp. on form 1120, the educational assistance would go in the same place that routine employer provided educational assistance would go. I don’t know what that is because I don’t file 1120 returns.  But since it has been an allowable employee benefit for many years, I assume there is some standard place to enter it.

[jzlthssw]

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!