If I Hire My Kids, Can I Give Them Tax-Free Education Benefits?

If your children work in your business, consider giving them education fringe benefits. Doing this right creates

• tax deductions for the business, and
• tax-free fringe education benefits for the child.

You can accomplish this without a Section 127 plan when your child needs the education to do the job for your business or to comply with a law or regulation.

In general, you can’t treat undergraduate degree programs as work-related education. If you pay for such programs outside of a Section 127 plan, you must treat the payments as taxable income to the child-employee.

But certain individual courses within a program may be evaluated separately, and certain courses, such as accounting courses for an employee-child with an accounting job, may qualify for tax-free working condition fringe benefit payments.

On the other hand, MBA programs can qualify as work-related education if they maintain or improve the employee’s skills for his or her current profession or business.

In addition to the possibilities listed above, if your child is age 21 or older, the Section 127 plan can offer up to $5,250 in tax-free education benefits.