A tax-favored way to help with employee student loans, and the plan that makes it work

Jul 2026 · 4 min read

You want to help your team, or yourself, with tuition or student loans. There is a way to do it tax-favored, up to $5,250 a year per person for federal income and payroll tax (state treatment may differ), that most owners either miss or botch. It hinges on getting the basics right, starting with a written plan set up before the money goes out. Skip that, and the same payment will typically be treated as taxable wages.

What the benefit is

An employer educational assistance program lets a business pay up to $5,250 a year of an employee's education costs without it counting as income to the employee for federal tax purposes (state treatment can vary). When structured properly, it can stay off their W-2, it is generally not subject to income or payroll tax, and the business can generally still deduct it. Under current rules, this can cover not just tuition and books but also student loan payments, principal or interest, which is what makes it useful to employees long past graduation.

Same $5,250 out the door. With the plan, it can land tax-free for federal income and payroll tax. Without it, you have likely created taxable wages and a payroll-tax bill for everyone involved.

The rules that trip up owners

The tax-free treatment comes with conditions, and they bite owner-heavy businesses hardest.

You need an actual written plan document. Not a policy in your head, not a line in the handbook added after the fact. The plan has to exist and employees have to be told about it.

It cannot discriminate in favor of highly paid employees. And here is the one that catches small businesses: no more than 5% of the benefits paid each year can go to owners who hold more than 5% of the business, counting their spouses and children. So a plan that mostly reimburses the owner's own loans fails, and the owner's payments become taxable.

It also cannot be offered as a choice against cash. If employees can take the money as salary instead, the exclusion is gone.

Where it goes wrong

• Paying first, documenting later. With no written plan in place when the payment is made, it is taxable wages. The document has to come first.
• Making it an owner benefit. If more than 5% of the year's benefits go to more-than-5% owners and their families, those payments are taxable. This is the usual failure point for small firms.
• Offering it instead of a raise. A cash-or-benefit choice disqualifies the exclusion. It has to be a benefit, not an option.
• Assuming it is unlimited. The $5,250 is a per-employee annual cap. Anything above it is taxable unless it qualifies under a different rule.

What to check before you start

• Do you have a written educational-assistance plan in place, and have employees been notified?
• Who is actually receiving the benefit? If it skews to owners, run the 5% test before you pay.
• Are you staying at or under the $5,250 federal limit per person for the year?
• Is the benefit offered on its own, not as an alternative to cash?

If you want to offer this the right way, or you are already paying education costs and are not sure they qualify, the Gnomon Diagnostic checks how you are set up before a payment turns into a tax bill. Start yours at start.gnomonplan.com.

This is general tax information, not advice for your specific situation. Talk with us or your tax professional before acting on it.