Q&A: Is Educational Assistance to Our Pastor Nontaxable?

Your pastor can exclude up to $5,250 of assistance benefits paid by the church each year under an educational assistance program.

Our senior pastor is pursuing an advanced degree through a seminary located in another state. Our church board would like to pay his tuition expense, since we believe that our church will directly benefit from this additional education. Are we required to report the amounts we pay as taxable income to the pastor, or are these payments nontaxable?

Note the following points:

  1. Under section 127 of the tax code, your pastor can exclude up to $5,250 of educational assistance benefits paid by the church each year under an educational assistance program. This means that the church should not include the benefits with the pastor’s wages and other compensation shown in box 1 of Form W-2.
  2. An educational assistance program in the context of church employers (1) is a separate written plan of an employer for the exclusive benefit of its employees to give them educational assistance; (2) cannot have eligibility requirements that discriminate in favor of officers or highly compensated employees or their dependents; (3) must not provide eligible employees with a choice between educational assistance and cash; and (4) must provide for reasonable notification of the availability and the terms of the program to eligible employees.
  3. Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for meals, lodging, transportation, or supplies.
  4. If the church pays more than $5,250 of the pastor’s educational expenses during the year, he must pay tax on the amount over $5,250. The church should include in the pastor’s wages (Form W-2, box 1) the amount that he should include in income.
  5. If the benefits over $5,250 qualify as a working condition fringe benefit, the church does not have to include them in the pastor’s wages. In general, education qualifies as a working condition fringe benefit if the pastor could have deducted the education expenses as an employee business expense if he paid the expenses himself. In general, education expenses are deductible as an employee business expense if the education (1) maintains or improves a skill required in a trade or business currently engaged in by the taxpayer, or (2) meets the express requirements of the taxpayer’s employer, applicable law, or regulations imposed as a condition of continued employment. However, education expenses are generally not deductible if they relate to certain minimum educational requirements or to education or training that enables a taxpayer to begin working in a new trade or business.
  6. This exclusion applies to both income tax and Social Security tax.
  7. The term “employee” includes self-employed persons for purposes of this exclusion.
Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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