The university administers the federal tax provisions regarding educational assistance (i.e., tuition benefits), as described below.

In general, IRS regulations consider anything of value provided to an employee by an employer to be a form of compensation. All compensation must be reported as taxable wages and is subject to income tax withholding, unless specifically excluded by the Internal Revenue Code (IRC).

Under IRC Section 117(d), educational institutions offering tuition reductions to employees, their dependent spouses and/or dependent children for undergraduate coursework may exclude the value of this education from their employees’ taxable wages. Therefore, any tuition assistance for undergraduate employees, dependent spouses and/or dependent children is not considered taxable income to the employee. Any tuition assistance provided to undergraduate non‐dependent spouses or non‐ dependent children will be considered taxable wages to the employee (dependent as defined by the IRS in IRC Section 152.) The exclusion under this section does not extend to graduate courses.

IRC Section 127 allows employers, whether or not they are an educational institution, to provide their employees with educational assistance for both undergraduate and graduate work. Employers may provide each eligible employee with up to $5,250 of educational assistance per year on a tax‐free basis. Over the course of the calendar year, the benefits will be accumulated to determine if and when the employee has reached the $5,250 limitation and the point at which the benefit becomes taxable. Therefore, any tuition assistance for graduate level employees will be considered taxable income when the benefits are in excess of $5,250 per calendar year.

Tuition benefits provided to graduate level spouse or children do not qualify for an exclusion from tax. Therefore, any tuition assistance for graduate spouse and/or children will be considered taxable income to the employee for every dollar of benefits paid during a calendar year.

Who is taxed

There are provisions in the Internal Revenue code that exempt certain groups of employees from taxation; however, there are certain groups who do have to pay taxes because no exclusion exists:

• An employee who is a graduate student is subject to tax withholding for tuition benefits paid which exceed the IRS limit of $5,250 per calendar year.
• A spouse/child who is a graduate student is subject to tax withholding for tuition benefits paid beginning with the first dollar of benefits.
• A spouse/child who is an undergraduate student who is not an IRS tax dependent of the eligible employee is subject to tax withholding for tuition benefits paid by the university beginning with the first dollar of benefits.
• An Other Eligible Person (OEP) or child of an Other Eligible Person, whether graduate or undergraduate student, is subject to tax withholding for tuition benefits paid beginning with the first dollar of benefits.

IRS Tax Dependents

In order for the undergraduate tuition benefits to be tax-free for a spouse/child of the employee, the spouse/child MUST be an IRS tax dependent. The WSU tuition benefits program doesn’t require the spouse/child to be an IRS tax dependent in order to be eligible for benefits, but it does require them to be an IRS tax dependent in order to receive the exclusion from taxation.

The “IRS tax” dependent is defined at this link: http://www.law.cornell.edu/uscode/text/26/152

Timing of taxation

Over the course of the calendar year, the benefits will be accumulated to determine if and when the employee has reached the $5,250 limitation and the point at which the benefit becomes taxable. Payroll will receive a summary of graduate tuition benefit for employees and their spouse/dependent children at the beginning of each term. The amount of taxable income will be calculated and will be spread out over a number of pay periods in the term, as the taxation must occur when the benefits are received per IRS regulations. Employees will be notified no later than 20 business days after the Last  Day for Tuition Cancellation of each term as to the amount of additional tax withholding.

Taxation rate

Graduate education tuition assistance is considered supplemental income and is therefore subject to the highest federal withholding rate. The IRS defines a flat supplemental tax withholding rate, which is gauged to the middle tax rate of the IRS graduated tables.

We cannot change the rate of withholding on this additional income. If you feel that your total federal income tax withholding for the year will exceed your tax liability, you may submit a new W‐4 Form to Payroll changing the number of exemptions you claim. Please see IRS Publication 919, available on the IRS website, for instructions on how to estimate your income tax liability and update your W‐4 accordingly. Please consult with your tax advisor to ensure that you have the appropriate withholding.

If enrollment changes or the student fails to earn a passing grade which results in a change to the employer-paid tuition benefits, withholding will not be adjusted by Payroll. Taxes can be reconciled when the employee files their individual tax return for that year.

Example 1:

An employee receives $10,250 in graduate tuition assistance for the term. The one-time annual employee assistance reduction of $5,250 is applied resulting in a taxable value of $5,000. This $5,000 will be recognized as income and reported on the employee’s Form W2 with all applicable taxes being withheld during the term it was received. Social Security, Medicare and Federal, State and City withholding taxes are required to be withheld. The calculations are:

Tax	Amount Taxed	Tax Rate	Total
Federal	$5,000	25%	$1,250
Social Security	$5,000	6.2%	$310
Medicare	$5,000	1.45%	$72.50
Michigan	$5,000	4.35%	$217.50
Detroit Resident	$5,000	2.5%	$125
Detroit Non-Resident	$5,000	1.25%	$62.50

Total taxes to be withheld on the $5,000 are $1,975.00 (city residents) and $1,912.50 (city non-residents). This amount divided over the number of pays in the term (typically 7 pays) equals an additional tax withholding per pay of $282.14 (city residents) or $273.21 (city non-residents).

Example 2:

Assume the same facts from Example 1, except that it is the employee’s spouse or dependent child receiving graduate tuition assistance. Neither a spouse nor dependent child qualifies for tax‐free treatment; therefore the entire $10,250 tuition assistance received is recognized as income and reported on the employee’s Form W2 with all applicable taxes being withheld during the term it was received. Social Security, Medicare and Federal, State and City withholding taxes are required to be withheld. The calculations are:

Tax	Amount Taxed	Tax Rate	Total
Federal	$10,250	25%	$2,562.50
Social Security	$10,250	6.2%	$635.50
Medicare	$10,250	1.45%	$148.63
Michigan	$10,250	4.35%	$445.88
Detroit Resident	$10,250	2.5%	$256.25
Detroit Non-Resident	$10,250	1.25%	$128.25

Total taxes to be withheld on the $10,250 are $4,048.76 (city residents) and $3,920.76 (city non-residents). This amount divided over the number of pays in the term (typically 7 pays) equals an additional tax withholding per pay of $578.39 (city residents) or $560.11 (city non-residents).

Please note that Wayne State University does not give tax advice, does not guarantee, and is not responsible for any final tax results. As such, we strongly encourage you to speak with a qualified tax advisor to answer questions specific to you and the tax implications resulting from receiving tuition assistance benefits.