Fee Waiver Taxation

The Internal Revenue Code (IRC) provides several ways to make employer-provided training and educational assistance, such as that provided through the CSU Employee Fee Waiver & Reduction Program, excludable from taxable income:

• Qualified Tuition Reduction under Internal Revenue Code Section 117(d); and
• Educational Assistance Programs under Internal Revenue Code Section 127;
• Working Condition Fringe Benefits under Internal Revenue Code Section 132(d).

With the exception of the Working Condition Fringe Benefit exemption under Internal Revenue Code Section 132(d), the following chart reflects the tax-free or taxable benefits resulting for eligible CSU employees and their eligible spouses, domestic partners, and/or dependent children:

*Taxable to the employee

Taxation on Employee Fee Waiver Benefits

• The value of fees waived for the eligible employee's use of their own Fee Waiver benefit is non-taxable for undergraduate courses.
• The value of fees waived for the eligible employee's use of their own Fee Waiver benefit for graduate/doctorate classes is nontaxable up to $5,250 per tax year.  The value of fees waived that exceeds $5,250 in a given tax year will be reported to the State Controller's Office and the additional taxes taken from the employee's paycheck.   See more detailed information on waiver taxation in the CSU Fee Waiver & Reduction Program Administrative Guide (PDF).

Change in Exempting Job-Related Graduate Coursework from Taxation for Employees: 
New effective with the 2019 tax year, all graduate/doctorate level courses taken by employees exceeding the $5,250 threshold will be taxable and the taxes withheld from the employee's pay warrant.  Graduate courses deemed job related, pursuant to Internal Revenue Code Section 132 (d), will no longer be excludable from W-2 wages.  Campuses will no longer be responsible for determining the taxability of employee fee waiver benefits under Internal Revenue Code § 13 2(d); working condition fringe benefits.  Employees are encouraged to consult with their own (personal) tax advisor to determine if courses taken are job related and include the deduction on their personal tax return, if eligible.

Transfer of Fee Waiver Benefit to Dependent

The value of fees waived for all graduate/doctorate level coursework taken by an employee’s spouse, domestic partner or dependent child through this program continues to be reported as taxable income to the employee and the additional tax deductions taken from the employees' pay.  All undergraduate level coursework taken by an employee’s domestic partner through this program is taxable as well.

Imputed Tax Rates

Imputed income related to participation in the CSU Employee Fee Waiver & Reduction Program, as outlined above, is subject to specific tax rates as follows:

• Federal  22% (Changed from 25% to 22% effective January 1, 2018--see IRS Notice 1036)
• State of California 6.6%
• Social Security 6.2 %
• Medicare 1.45 %
  Calculate Estimated Taxes Here (XLSX)

The imputed income is reported to the State Controller's Office once each term. The reporting is done after Census for the term, so there is no adverse tax reporting on imputed income when an employee or an employee’s dependent drops courses.

References

• CSU Fee Waiver & Reduction Program Administrative Guide (PDF) - dated January 15, 2020
• Applicable Internal Revenue Code (IRC) sections:
  
  • Qualified Tuition Reduction under Internal Revenue Code Section 117(d); and
  • Educational Assistance Programs under Internal Revenue Code Section 127;
  • Working Condition Fringe Benefits under Internal Revenue Code Section 132(d) (for employees to pursue through their personal tax advisor, if applicable).