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Tax implications for Seattle University employees

Under IRS section 127, the first $5,250 of graduate tuition remission benefit granted by the University are excludible from taxable income during a calendar year and the remainder is taxable and included in taxable income. The taxable portion of graduate tuition remission benefits is included in the employee’s Form W-2 in Box 1, 3, and 5, and the respective taxes that are withheld are reported in Box 2, 4, and 6.

Due to this $5,250 exclusionary amount, the tax will usually not be triggered until mid-Summer or even later in the year around October when the employee’s full tuition remission amount is known. When the tax event is triggered the IRS requires the employer to withhold from the employee’s paycheck mandatory taxes such as FICA, Medicare, and Federal Income Tax.

Since the graduate tuition benefit above the exclusionary amount is taxable income, it is added to the employee’s income for the respective pay period and taxes are withheld. As a result, the employee’s pay check could be reduced significantly and often times it puts the employee’s earnings in a higher tax bracket.

As a courtesy, the Payroll Office is offering an option for employees who are under the graduate remission program to spread the taxes assessed on the tuition remission above $5,250 over the remaining calendar year.

Illustration number 1 below shows the tax impact of spreading additional income over 6 months and illustration number 2 shows the tax impact of an employee who does nothing as he or she chooses not to spread the additional income over the remainder of the year.

Illustration 1 and 2 facts

Employee A projects to receive $12,000 in graduation tuition remission during calendar year 2008. The taxable amount would be $6,750 ($12,000 less $5,250 exclusion). Employee A earns $2,000 per month; she is claiming a single status with no dependents on her Form W-4.

Illustration 1

Employee A did not submit the “Request To Spread Over The Taxes of Graduate Tuition Remission Benefit” in January’08 but decided to do so in July’08. Employee A’s monthly net pay check for the remainder of 2008 calendar year would be calculated as follows:

(*) FICA and Medicare taxes assessed at 7.65% of taxable income, and Fed Inc. tax rates vary by individual.

Employee A will receive net pay of $1327.69 per month from July through December.

Illustration 2

Employee A “DOES NOT DO” anything and employee A’s full tuition remission amount for the year of $12,000 is known in October. $6750 will be taxed over the remaining months of October, November, and December.

Employee A will receive $960.37 in October through December.

Request form

The Payroll Office has a request form for employees who wish to spread their additional graduate remission income over a term of months. You can also find the form attached to this memo. Deadline for tax inclusion in July paycheck is Tuesday, July 15th. The Payroll Office will reconcile your actual graduate tuition remission benefits around the first week of October.

Please contact Rita A. Lin, MBA, CPP, Payroll and Endowment Manager, Seattle University, Office of The Controller, Payroll Office, 901 12th Ave, USVC 202, Seattle, Washington 98122-1090; phone +1-206-296-5887; fax +1-206-296-5896