Category Personnel/Employment
Title School Tuition Discounts and Bartering
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School Tuition Discounts and Bartering
Revised August 2013

This article was published in the Legal Legislative Update several years ago.  This article has been revised to reflect laws as of August 2013.  The tuition amount used is only for informational purposes and should not be assumed as the average Christian School Tuition.  Schools can plug in their own numbers to determine applicability.

ACSI's national and regional offices receive numerous inquiries on the topic of tuition discounts and tuition bartering. We would like to provide you and your board members with specific answers and examples that will help you as you make school policy. This article will be divided into three sections: tuition discounts for employees, tuition discounts for non-employees, and tuition bartering.  

Discounted Tuition for Employees

Schools are permitted to establish "Qualified Tuition Reduction Plans" (QTR) for different groups within their organization. Under such a plan tuition discounts are legal if everyone within a particular employment classification is offered the same discount. For instance, teachers could make up one group and support staff another group. A school board may set up its groups to include any type of discounts for part-time staff. However, most offer part-timers a discount proportionate to the discount offered to a full-time person in the same group. It is a good idea for the board to include information on the different groups and their discounts as a part of the board minutes and written policy for your school. In most cases, highly compensated employees may receive the discount, but it becomes taxable for them.  In most cases, church staff of the sponsoring church also may receive a discount on tuition, but it is also taxable to that individual.  Please contact your accountant or tax attorney for information as it pertains to your fact-specific situation.  

Example 1
Full-time school teachers receive a 60% tuition reduction for their own children to attend school. The amount of money that is saved by the discount is not reportable income for federal, state, or social security purposes since the school has a QTR and all full-time teachers are offered the same discount.   

Example 2
A part-time school teacher teaching subjects for half a school day could be a part of the teacher group in Example 1 but receive only half of the benefit or a 30% tuition reduction. School boards may set the amount of the discount when the written QTR is established. The tax information given in Example 1 also applies.  

Example 3
Since school secretaries and custodial personnel were included in the school's QTR, Mr. Jones, who does custodial work full-time, has children that qualify for the 25% discount offered by the school to all that work within the support classification. The tax information given in Example 1 also applies.   Frequently, ACSI is asked whether a teacher may pay any remaining tuition that is due (after any applicable discount) for his/her child with pre-tax salary dollars. The answer is clearly, "No," according to the Internal Revenue Code. All applicable taxes must be deducted from the full salary before any required tuition is paid by the employee. A teacher may request as a convenience for the school to deduct any owed tuition from his/her remaining take home pay. Failure to follow this procedure subjects the teacher and could ultimately subject the school to tax and penalty liabilities!  

Tuition Barter Arrangements 

Frequently, schools will barter or swap tuition charges for goods (books, equipment, supplies, etc.-essentially any item of value) or services (accounting, legal, secretarial, teaching, etc.-essentially any service). On the surface this arrangement is very appealing due to the simplicity of the swap. Education which generally adds no additional cost to the school is exchanged for goods or services with no accounting or taxes. However, this is not the case since the Internal Revenue Service and all states require any exchange of goods and services (excepting those of relatively minor value, say $25 or so) to be reported. This will necessitate both valuation and full accounting.  

Generally, the exchange of goods or services as they related to tuition should be valued objectively "at arm's length." The value of the tuition would be used as the yardstick for determining the valuation for the wages paid. One needs to be conscious of the prevailing wage structure at his/her school and the surrounding community (especially if your school's wage structure is not representative) when determining the values for both sides of the exchange. The parameter of the hours or goods that make the exchange should then be set so that the exchange is relatively equal. It is not good practice to exchange services that would create an extremely higher or lower wage than comparable workers at your school receive. Exchanging a good or service whose value is much greater or less than the tuition being exchanged creates its own set of problems. "Good deals" may become accounting nightmares if reviewed by your state or federal authorities. You must also keep in mind that the exchange of value must meet federal and state minimum wage guidelines.  

It is important to consider that many barter exchanges of tuition for services performed personally will result in the individual being classified as an employee whether you would have normally considered the person a member of your staff or not. This is because the substance of the transaction is one of an employer-employee relationship because you have control over the person's methods of work and times to report. Also, this relationship is continuous over time. However, in conditions where the individual does not personally provide the service (such as in Example 8 below), the employee relationship generally will not exist.  

Regardless of whether the individual is placed in an employer-employee relationship, all transactions will be reportable! The reportable amounts are the full value of the items or services being exchanged when compared to the value of the tuition. The only difference is in how it is reported. Consider these examples:  

Example 4
A school needs weekly janitorial services. John Smith agrees to provide such services personally in exchange for his son's annual tuition charge of $4,000. He will be working for 40 weeks receiving $4,000 in pay (the value of tuition) which works out to $100.00 per week. Since he is working 10 hours per week, this is equivalent to $10.00 per hour which is above the federal and his state's minimum wage.   The $4,000 in salary is includable in all state and federal payroll reports. Smith will receive a W-2 form listing the $4,000 income since he technically qualifies as an employee. He really should be identified as such. Applicable state and federal withholdings are required. He should be covered by workers compensation and social security  

Example 5
All the facts are the same as Example 4 except that John Smith works 20 hours per week. Result: The school is then in effect paying him $5.00 per hour which is a violation of the federal Fair Labor Standards Act which mandates the payment of the minimum wage. The current federal minimum wage is higher than the $5.00 per hour. If a state has a higher minimum wage, it will take precedence. Violation of the Act could easily result in substantial financial penalties for the school.   Working 20 hours per week may also create a situation where he is qualified to participate in the school's 25% tuition reduction for full-time custodial staff depending upon how the school board set up its QTR. Since he is now a "half-time" person, he may qualify to receive a proportionate 12.5 percent tuition discount in addition to his pay.  

Example 6
Same facts as Example 4, except that John Smith is employed at the school as a teacher an also provides janitorial services after hours. The school does not have a QTR. In this case the $4,000 for custodial work is added to his teacher's salary which is includable in all state and federal payroll reports. He pays his son's full tuition and his W-2 reflects the full income of both his teacher's salary and the custodial income. Applicable state and federal withholdings are required.   If the school had a QTR, and his classification group received a 50% tuition discount on $4,000 of tuition, he would have a tax-free benefit of $2,000 of discounted tuition. However, he still must report his full teacher's and custodian's income.  

Example 7
Lynn Jones, a "volunteer" office worker at the school, pays only 50% of the annual tuition charges for her daughter's tuition. Annual tuition charges are $4,000 of which she pays $2,000. Mrs. Jones is not a part of a QTR. Her $2,000 salary would be includable as income in all state and federal payroll reports. Jones' W-2 reflects the income. Applicable state and federal withholdings are required. She should be covered with worker's compensation.  

Example 8
Bill Jones owns ABC Janitorial Service and his daughter attends the school. He offers to barter janitorial service for the year for his daughter's tuition. The work is done by employees of his company. This is not an employee relationship which would result in a W-2 form, but rather that of an independent contractor. ABC Janitorial will receive an IRS form 1099-Misc. which reflects the $4,000 of income since it is miscellaneous income over $600. The school reports the $4,000 on IRS form 1096 "Annual Summary and Transmittal of U. S. Information Return." This is the form on which all 1099 forms for miscellaneous or barter transactions are summarized at the end of the year. It is suggested in any such transaction that both the school and Bill Jones consult their tax accountants or attorneys for guidance.  

Example 9
If, as an individual, Bob Smith trades computer equipment worth $4,000 to the school in exchange for his son's tuition of $4,000. "Fair market value" must be used when the equipment's value is determined when compared to the tuition. If the trade involves equipment with a "fair market value" worth more than the tuition, a tax-deductible receipt may be given to Smith for the difference in value. If the equipment is worthless, he must pay the difference in tuition.   If Bob Smith owns a company or corporation and removes this equipment from its inventory to give to the school, additional tax issues are raised which are beyond the scope of this article. It is suggested in any such transaction that both the school and Bill Jones consult their tax accountants or attorneys for guidance.  

Example 10
Jean Everson volunteers to help several mornings a week as a teacher's aide in the Kindergarten class. She receives no compensation and has one child in the school. Now here's a true volunteer! Isn't it wonderful when the Lord sends us someone like this from time to time.  

From the above discussion bartering services for tuition can present a host of problems. It is for this reason that ACSI suggests that you take the conservative approach and classify all individuals illustrated by examples 4-7 as employees. (In example 8, the person working on school property is an employee of someone else.) When employees receive their payroll checks, they can always sign them over to pay their school obligations, and you are in the clear!  

To summarize this section, the first thing is to make sure that all exchanges being made in your school are accounted for. Next, you need to fix a value to the service or good being exchanged based on the value of the tuition to ensure the equality of the transaction. Then, determine whether all individuals exchanging services are properly classified and that all goods and services are included in the applicable federal and state payroll reports. Finally, make certain that all applicable state and federal withholdings have been made and that the individuals are covered by worker's compensation.  

Addendum  

Here are several things that your school should be concerned about if you allow individuals to barter for school tuition:  

1) You need to check to see if the number of hours that are worked for the discount at least equal the minimum wage required for your state. Minimum wage laws still apply.  

2) Did you count the person that is bartering as an employee for worker's compensation and pay a premium that includes that bartering person? If not, and the person is injured at your school, it is likely that the school may have to pay the medical bills out of pocket. Talk to your insurance carrier about how to count a "bartering" employee.  

3) If you discount $600 or more tuition, the person must be issued an appropriate IRS form documenting the amount of money "earned." The problem with this is that school years do not coincide with calendar years, so you must keep track of the discount for one-half of one school year and one-half of a different school year and then be prepared to issue the IRS form to the person by the end of January for the previous calendar year.  

4) If the person doing the bartering is on the school premises on a regular basis, such as nightly custodial work, is he/she considered an employee? If so, does this person have to meet the lifestyle requirements like other employees? Is the person invited/expected to attend staff in-service or other training events? Do you issue the person an employee handbook? I don't know the answer to these questions, but your school board/administrative team should discuss these questions.    

This article was originally written by Burt Carney.  Research materials made for the preparation of this article were provided by Dale Kennedy, member school administrator and CPA; and John L. Cooley, attorney, and former Christian school administrator.     

Notice: This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It has been provided to member schools with the understanding that ACSI is not engaged in rendering legal, accounting, tax, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Laws vary by jurisdiction, and the specific application of laws to particular facts requires the advice of an attorney.  

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