What expense category is Educational Assistance Programs?

Investing in your employees' growth through education is a powerful way to build a skilled and loyal workforce. The IRS supports this by allowing businesses to deduct the costs of formal Educational Assistance Programs, which provide significant tax advantages for both the employer and the employee.

However, to be deductible, these benefits must be offered through a structured, qualified program. This guide explains how to categorize these expenses, the key IRS rules you must follow, and how to track program costs for full tax compliance.

Educational Assistance Programs Expense Category

The amounts an employer pays or reimburses for employee education expenses under a qualified plan are considered an employee benefit program.

As detailed in IRS Publication 535, you can generally deduct these payments as an ordinary and necessary business expense. On your company's books, these costs should be tracked in a specific account, such as Employee Benefits or Educational Assistance, to keep them separate from regular wages or other training expenses.

Important Considerations When Classifying Educational Assistance

To ensure your contributions are deductible and the benefits are tax-free to your employees, the program must meet specific IRS requirements.

What is a Qualified Educational Assistance Program?

According to IRS Publication 535, a qualified program must be a formal, written plan established for the exclusive benefit of your employees. Key requirements include:

• The plan cannot favor highly compensated employees or owners.
• You must provide reasonable notification of the plan's availability and terms to all eligible employees.

When a program is qualified, the payments you make are deductible by the business, and the benefits received by the employee are generally excluded from their taxable income, up to annual limits set by the IRS.

Distinction from Ordinary Education Expenses

It's important not to confuse benefits paid under a formal assistance program with deductions for an employee's general work-related education.

• Educational Assistance Program: A formal benefit plan where the employer's contributions are deductible as an employee benefit.
• Work-Related Education: If you, as the owner or an employee, pay for education that maintains or improves skills for your current job, those costs can be deductible under different rules (as explained in Publication 334). An assistance program can cover a broader range of education, not just what is immediately job-related.

Student Loan Repayments

A provision in the CARES Act, noted in IRS Publication 535, temporarily expanded the definition of educational assistance to include employer payments of an employee's student loans. This provision, which allowed employers to make tax-free student loan contributions on behalf of employees, expired on January 1, 2026, unless extended by new legislation.

Examples of Educational Assistance Program Expenses

A qualified program can cover a variety of educational costs paid on behalf of an employee, including:

• Tuition and fees for undergraduate or graduate-level courses.
• The cost of books, supplies, and required equipment.
• Payments for online courses and certificate programs.

Tax Implications and Recordkeeping

Proper reporting and documentation are essential for deducting these expenses and ensuring your plan remains qualified.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), contributions to qualified educational assistance programs are deducted under Part II, Line 14, Employee benefit programs (other than Pension and profit-sharing plans).

What Records to Keep

You must maintain records to prove that your plan is qualified and to substantiate the expenses you deduct. These records include:

• The formal written plan document.
• Records showing which employees are eligible and participating in the program.
• Proof of payments made, whether as direct payments to an educational institution or as reimbursements to an employee. This includes receipts for tuition, books, and fees submitted by employees, and your own canceled checks or bank statements.

How Fyle Can Automate Tracking for Educational Assistance

Fyle helps you manage and document all employee reimbursements for educational assistance, ensuring every payment is compliant and properly recorded.

• Capture Employee Claims: Employees can easily submit tuition receipts and other documents to Fyle for reimbursement under your company's plan.
• Enforce Policy Limits: Establish automated policies to ensure reimbursements do not exceed the annual per-employee limits established by the IRS.
• Create a Clear Audit Trail: Fyle keeps the employee's submission, the school's invoice or receipt, and your proof of reimbursement together in one digital record.
• Automate Your Accounting: Sync categorized educational assistance expenses directly to your Employee Benefits account in QuickBooks, Xero, NetSuite, or Sage Intacct.