Payroll in Practice: 5.17.21

Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.

Question: Some of our employees take classes at the request of the company to improve various skills. Employees attend industry-specific schools as well as state universities and pay the tuition. Is this a taxable fringe benefit for the employee?

Answer: There are some situations when it might be taxable. For example, if the tuition payments are paid as an allowance and the payments are not made in accordance with the accountable plan rules for employee business expense reimbursement, the amount paid would be included in employee taxable wages.

However, what you describe is most likely a working-condition fringe benefit. Under the working-condition fringe benefit exclusion, payments are excluded from employee wages because the education qualifies as an employee business expense. To qualify, the education must meet one of two conditions.

• The education must be required by the employer or by law for an employee to keep his or her present salary, status, or job and serve a bona fide business purpose of the employer, or
• The education must serve to maintain or improve knowledge or skills needed by the employee in performing a job.

In either case, any reimbursement must be made under the accountable plan rules for the payment to be excluded from income.

Even if the education meets one or both of the tests, it is not qualifying education if it is needed to meet the minimum educational requirements of the employee’s present trade or business, or it is part of a program of study that will qualify the employee for a new trade or business.

For example, a current employee is required to complete a General Educational Diploma program to meet the minimum education requirements for the job the employee is currently performing. The benefit is not a working condition fringe benefit.

In another example, an engineer is working toward a master’s degree in business administration to meet the qualifications to become an engineering supervisor. The tuition payment for the MBA program does not qualify for exclusion from income as a working condition fringe benefit because the education will qualify the employee for a new profession.

If the payment does not qualify as a working condition fringe benefit, the employer may be able to exclude up to $5,250 per year from an employee’s wages under an Education Assistance Program.

In the two examples, when the benefits did not qualify as working condition fringe benefits, they might be excludible as educational assistance. Payments under an education assistance program are a separate benefit from the working condition fringe benefits. For example, education assistance benefits do not have to meet the business purpose or the employment related knowledge or skills requirements.

Under an education-assistance plan, any reimbursement during the year that exceeds $5,250 is included in wages. IRS instructions provide that working-condition fringe benefits are not included in determining when the $5,250 limit for the education assistance benefit is reached.

Employer payments that qualify for the education assistance exclusion are payments for tuition, books, equipment, fees, and supplies required for the education. However, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education has a reasonable relationship to the employer’s business or is required as part of a degree program.

Additionally, payments for tools and supplies the employee is allowed to keep after the course ends or payments to cover meals, lodging, or transportation do not qualify for the exclusion.

As part of the coronavirus pandemic relief, Congress passed legislation that expanded the definition of education assistance to include certain employer payments of student loans. This exclusion applies to employer payments of principal or interest on any qualified education loan incurred by the employee for the employee’s education. The payments may be made to the employee or directly to a lender.

This provision initially only applied to payments made after March 27, 2020, through the end of 2020. Congress later extended the provision to include payments made through 2025. This provision does not change the $5,250 maximum amount that may be excluded from wages during the year.

To exclude the benefits, the employer must have a separate written plan for providing education benefits. The plan must meet certain specific tests regarding notification of employees, employee eligibility for benefits and nondiscrimination requirements.

Question: Our farming operation grows fruit and vegetables, which we clean, package, and sell. We added a processing facility to turn some of our produce into relishes and preserves. Some of our workers are to be involved in both operations. Are we required to separate employees into Form 941 and Form 943 categories, or can we continue to report all our workers as agricultural employees on Form 943?

Answer: Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, generally is required for employers of farmworkers and Form 941, Employer’s Quarterly Federal Tax Return, is required for nonfarmworkers. The reason for separating the two categories is the tax rules for farmworkers are different from the general employment and Federal Unemployment Tax Act rules. Additionally, the deposit schedule rules are determined and applied separately to tax deposits for each of the payroll returns, including Forms 941, 943, and 944, Employer’s Annual Federal Tax Return.

Assuming that your farming operation employs workers who are clearly farmworkers, Form 943 is to be used for those workers. However, any workers who do not qualify as farm employees are not farmworkers and cannot be included on Form 943. Separate reporting for the nonagricultural workers is required for Forms 941 and Form 944.

Farm employment, according to IRS “Publication 51, Circular A, Agricultural Employer’s Tax Guide,” includes, among other activities, the handling, processing, or packaging of any agricultural or horticultural commodity in its unmanufactured state, provided the employer produced more than half of the commodity, or if for a group of up to 20 unincorporated operators, all of the commodity.

If the commodity-production requirements applicable to the operators are not met, then the processing, packaging, and delivering of any commodity in its unmanufactured state is a nonfarm activity.

Farm employment does not include processing services that change a commodity from its raw or natural state, or services performed after a commodity has been changed from its raw or natural state. Additionally, farm employment does not include reselling activities that do not involve any substantial activity of raising agricultural or horticultural commodities, such as a retail store or a greenhouse used primarily for display or storage.

Based on your description, and assuming the production requirements are met, the workers involved in the processing and shipping of unmanufactured produce qualify as farmworkers, include their wages and taxes on Form 943. However, workers involved in converting the raw produce into relishes and preserves do not qualify as farm employees. Any wages related to those activities should be reported on Forms 941 or 944.

By Patrick Haggerty

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.