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Tuition Remission: How Colleges and Schools Handle the Tax Rules and Payroll Reporting
Last updated: October 12, 2026 · Independent guide · We do not sell rankings or coverage.
Tuition remission is tax free under IRC Section 117(d) when an eligible school reduces tuition below the graduate level for employees, certain retirees and surviving spouses, and their spouses and dependent children, and the plan does not favor highly compensated employees. Graduate remission is tax free only for students who teach or do research for the institution. An employee’s other graduate courses are taxable above the $5,250 Section 127 limit unless they are job related. Anything taxable is imputed income that you report in Form W-2 boxes 1, 3 and 5.
The rule in brief
- Who it applies to: colleges, universities and K-12 schools that are educational organizations under IRC 170(b)(1)(A)(ii).
- Requirement: undergraduate or K-12 tuition reductions for covered people are excluded with no dollar cap; graduate reductions only for teaching or research assistants, minus any payment for services.
- Threshold: $5,250 per calendar year for an employee’s own graduate courses under a written Section 127 plan, indexed for inflation for tax years beginning after 2026.
- Key dates: treat taxable benefits as paid by December 31; furnish and file 2026 Forms W-2 by February 1, 2027.
- Official sources: 26 U.S.C. 117, IRS Publication 970 and Publication 15-B, checked October 12, 2026.
What Section 117(d) requires
Section 117(d)(1) says “gross income shall not include any qualified tuition reduction.” Section 117(d)(2) defines that as a tuition reduction for education below the graduate level, provided to an employee of an eligible educational organization, for study at that organization or another one. Publication 970 confirms that courses an employer arranges at another eligible institution can qualify, which is what makes tuition exchange agreements work (IRS Publication 970 (2025), page last reviewed April 30, 2026).
Publication 15-B lists who is covered: a current employee, a former employee who retired or left on disability, the surviving spouse of an employee or such a former employee, and the dependent child or spouse of any of them (IRS Publication 15-B (2026), page last reviewed April 30, 2026). Publication 970 adds that a child under 25 whose parents have both died counts as a dependent child, and that “below the graduate level” includes primary and secondary school. Table 2-1 of Publication 15-B shows a qualified tuition reduction as exempt from income tax withholding, social security, Medicare and FUTA.
| Who takes the course | Level | Federal treatment | Authority |
|---|---|---|---|
| Employee, retiree, surviving spouse, spouse, dependent child | Undergraduate or K-12 | Excluded if the plan does not favor HCEs | IRC 117(d)(2), (3); 132(h) |
| Teaching or research assistant | Graduate | Excluded, except any payment for services | IRC 117(d)(5), 117(c) |
| Employee, not a TA or RA | Graduate | Taxable above $5,250 unless job related | IRC 127, 132(d) |
| Spouse or dependent child | Graduate | Taxable to the employee | IRC 117(d)(2); 127 covers employees only |
Graduate assistants and the payment-for-services rule
Section 117(d)(5) removes the graduate-level bar for a graduate student who teaches or does research for the institution. Section 117(c) then takes back compensation: Publication 970 says you must include in income the part of a tuition reduction that pays for teaching, research or other required services, even if every degree candidate must perform them. The only exceptions are the National Health Service Corps and Armed Forces Health Professions scholarship programs and work-college programs.
Neither source gives a formula for separating the service element, so appointment letters and stipend policy carry the weight. Federal cost principles at 2 CFR 200.466 (eCFR, up to date as of October 8, 2026) allow remission charged to a federal award when it is reasonable compensation explicitly conditioned on the work. If those charges flow into your Schedule of Expenditures of Federal Awards, have your tax advisor review the grant language and the payroll treatment together.
Employee graduate tuition: $5,250 and job-related courses
Section 127. Publication 15-B lets you exclude up to $5,250 of educational assistance per employee per year, including graduate courses, under a separate written plan. The plan must not favor highly compensated employees, must not offer cash instead, and may not give more than 5% of benefits to more-than-5% owners. IRS fact sheet FS-2026-10 confirms $5,250 for 2025 and 2026, with cost-of-living adjustments for tax years beginning after 2026 (IRS, April 2026). Section 127 covers only the employee’s own education, so it cannot shelter a spouse’s or child’s graduate remission.
Working condition fringe. Amounts above $5,250 can still be excluded under Section 132(d) if the education is required to keep the employee’s job or maintains or improves skills needed in it. It fails if it meets the job’s minimum educational requirements or qualifies the employee for a new trade or business. Publication 15-B says each course must be evaluated individually, so approve courses, not whole degrees.
Highly compensated employee nondiscrimination
Section 117(d)(3) lets a highly compensated employee exclude remission only if it is available on substantially the same terms to a group defined by a reasonable classification that does not favor HCEs under Section 414(q). For 2026, Publication 15-B treats an employee as highly compensated if they were a 5% owner in 2025 or 2026, or earned more than $160,000 in 2025, with an option to limit the pay test to the top 20% of earners. The statute sets no coverage percentage, so the risk lies in plan design: a benefit limited to senior administrators, or richer for one group without a defensible classification, makes the HCEs’ remission taxable wages.
Who falls outside the exclusion
- Domestic partners. Publication 15-B states that registered domestic partners are not married for federal tax purposes, and California State University San Marcos taxes partner fee waivers at every level (CSUSM, last modified October 9, 2024).
- Children who are not dependents. The University of Scranton taxes their remission and may ask for the prior year’s tax return as proof (University of Scranton, no date shown).
- Graduate study by spouses and children, unless they hold their own TA or RA appointment.
Withholding, deadlines and penalties
Publication 15-B lets you treat a taxable noncash benefit as paid per pay period, quarterly, semiannually or annually, provided everything for the year is treated as paid by December 31. You can split one semester’s value across several paychecks and withhold at the 22% supplemental rate. If you deposit tax you did not fully withhold, you must recover the income tax from the employee before April 1 of the next year. The optional special accounting rule lets you push November and December benefits into the next year, but you must apply it to every employee receiving that benefit.
The General Instructions for Forms W-2 and W-3 (2026), page last reviewed April 30, 2026 require taxable fringe benefits in box 1 and, where applicable, boxes 3 and 5; showing them in the new box 14a is optional. For forms due after December 31, 2026, late or incorrect filing costs $60, $130 or $340 per form depending on timing, and at least $690 for intentional disregard.
Illustration with constructed numbers: a staff accountant takes non-job-related graduate courses and the university waives $9,000 in 2026. Its Section 127 plan excludes $5,250, leaving $3,750 taxable. Federal withholding at 22% is $825 and employee FICA at 7.65% is $286.88. Spread over five paychecks, each carries $750 of imputed income that raises taxable wages but adds nothing to net pay.
Form 1098-T and records to keep
The 2026 Instructions for Forms 1098-E and 1098-T do not address tuition remission directly, but you need not file for a student whose tuition is entirely waived. Partial waivers still need a 1098-T. Keep these records:
- The remission plan and a separate written Section 127 plan; the IRS sample is Publication 5993 (Rev. 4-2026).
- Your eligibility classification and each year’s HCE list.
- Proof of each student’s relationship and dependency status.
- Course-level job-related approvals and TA or RA appointment letters.
- Copies of Forms W-2 Copy A and W-3 for at least four years.
The IRS says examiners look at benefit handbooks, contracts, written policies, reciprocity agreements and student rosters, and warns that payroll may not know what HR has granted (IRS, page last reviewed October 9, 2026).
What to set up in your systems
The student system posts the waiver; HR and payroll tax the employee. The student side knows course level and amount, while HR knows relationship, HCE status and Section 127 usage, so the handoff is where errors happen. Whatever your vendor, build:
- Separate waiver codes for employee undergraduate, employee graduate, spouse, child, domestic partner, TA/RA and exchange students.
- A term extract after census with employee ID, relationship, level, amount and term. CSUSM reports after census so dropped courses do not create taxable income.
- An imputed earnings code taxable for income tax, FICA and state tax but excluded from net pay, plus prior-year correction codes.
- A calendar-year accumulator for the $5,250, since terms cross December 31.
Ellucian Banner. Ellucian’s documentation requires a customer login. Southern Illinois University Edwardsville’s published Banner earn codes show the pattern, with separate codes for employee and graduate assistant taxable tuition benefits, prior calendar-year versions, and a code for waivers above the limit (SIUE, no date shown).
Oracle. In PeopleSoft Campus Solutions, waivers are set up under Set Up SACR > Product Related > Student Financials > Tuition and Fees > Waivers, with percentage, flat, per-unit or capped amounts that tuition calculation can apply automatically (Oracle, no date shown). Oracle Student Management applies waivers during tuition calculation but requires manual student assignment (Oracle, created September 28, 2026). Neither page describes a payroll handoff. Oracle’s US HRMS guide defines imputed earnings as non-cash earnings not paid directly to the employee, and its balance definitions count them in gross earnings but not net pay (Oracle, no date shown).
Workday. Workday’s administrator documentation is also gated. California College of the Arts has employees request tuition remission in Workday, processed from the start of add/drop (CCA, December 7, 2023), and Worcester Polytechnic Institute spreads spousal imputed income across the months of each term (WPI, revised April 29, 2025). Ask your partner to demonstrate how the imputed pay component, the accumulator and the student waiver connect. For broader selection, see our guides to HR software and nonprofit accounting software.
How we researched this
We read IRC 117 and 132(h), Publications 970 and 15-B, the 2026 W-2 and 1098-T instructions, the IRS qualified tuition reduction page and FS-2026-10 on October 12, 2026. The pages ranking for this topic are single-institution HR pages (St. Lawrence, UMBC, Florida Tech, Scranton) that skip HCE testing, timing elections, 1098-T and system design. We used public vendor documentation where it exists and named institution pages where it does not.
Related guides
- Higher Education ERP: Finance, HR and Student Systems
- Student Billing Software for Colleges: A Buyer’s Guide
- Private School Accounting Software: How to Choose (2026)
Frequently asked questions
Is tuition remission taxable income?
Undergraduate and K-12 remission for employees and their families is not taxable if it is a qualified tuition reduction under IRC 117(d) and does not favor highly compensated employees. Graduate remission is taxable unless the student is a TA or RA, or the employee’s own courses fit within $5,250 or are job related.
Is graduate tuition remission for my child taxable?
Usually yes. Section 117(d) covers family members only below the graduate level, and Section 127 covers only the employee’s own education, unless the child holds their own teaching or research appointment.
Does the $5,250 limit apply to undergraduate tuition remission?
No. A qualified tuition reduction has no dollar cap. The $5,250 limit belongs to Section 127 plans.
Where does taxable tuition remission go on the W-2?
Report it in box 1 and in boxes 3 and 5 as social security and Medicare wages. Box 14a is optional.
Can we tax tuition remission once a year?
Yes. Publication 15-B allows any period at least annually, as long as the year’s benefits are treated as paid by December 31, though spreading it over the term avoids one large withholding hit.
Sources
- LII, 26 U.S.C. 117 and 132, no date shown, checked October 12, 2026. 117, 132
- IRS, Publication 970 (2025), April 30, 2026. irs.gov
- IRS, Publication 15-B (2026), April 30, 2026. irs.gov
- IRS, General Instructions for Forms W-2 and W-3 (2026), April 30, 2026. irs.gov
- IRS, Instructions for Forms 1098-E and 1098-T (2026), April 30, 2026. irs.gov
- IRS, Qualified tuition reduction, October 9, 2026. irs.gov
- IRS, FS-2026-10, educational assistance FAQs, April 2026. irs.gov
- IRS, Publication 5993, Rev. 4-2026. irs.gov
- eCFR, 2 CFR 200.466, October 8, 2026. ecfr.gov
- Oracle (vendor), Campus Solutions 9.2 waivers, no date shown. docs.oracle.com
- Oracle (vendor), Student Management waivers, September 28, 2026. docs.oracle.com
- Oracle (vendor), HRMS Implementation Guide (US), no date shown. docs.oracle.com
- SIUE, Banner earn codes, no date shown. siue.edu
- California College of the Arts, December 7, 2023. cca.edu
- WPI, revised April 29, 2025. wpi.edu
- CSUSM, October 9, 2024. csusm.edu
- University of Scranton, no date shown. scranton.edu
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
