In accordance with the University of Illinois' Educational Assistance Plan that is in compliance with Internal Revenue Code Section 127, the value of graduate-level educational benefits exceeding $5,250 is subject to employment taxes and must be reported as taxable wages on Form W-2. This taxation does not apply to qualified Teaching Assistants or Research Assistants.
The University must withhold federal and state income taxes, as well as Social Security and Medicare taxes, if applicable, on taxable tuition waivers, as required by the IRS and other regulatory agencies. Effective January 1, 2012, federal and state income taxes will be withheld at graduated rates on taxable tuition waiver amounts in excess of $5,250. The calculation of the tax withholding will be in accordance with the employee's current Form W-4 on file with the University Payroll & Benefits (UPB) Office.
Individuals may change their Form W-4 via NESSIE (https://nessie.uihr.uillinois.edu/cf/comp/index.cfm?Item_id=1056&rlink=674) to adjust their withholding. Also, Monthly- and Bi-weekly Tuition Benefit Net Pay Calculators are available to employees on the OBFS website to assist in determining the effect of the withholding on their pay. The calculators are located at http://www.obfs.uillinois.edu/payroll/ on the right hand side of the page.
Due to the change from the supplemental to the graduated tax withholding rates, the following process changes will occur within University Payroll Benefits:
- If a tuition waiver amount needs to be applied outside of regular pay cycle processing due to an employee being in an inactive pay status (i.e., leave of absence or termination), the supplemental withholding rate will be assessed on the transaction.
- All corrections will be processed on the next regularly scheduled tuition waiver assessment period. Any approved exceptions for adjustments outside the normal tuition waiver process will be applied on the next regular payroll cycle.
The change to the graduated rates applies ONLY to tuition waivers. All other taxable benefits will continue to be taxed at the supplemental withholding rate (25% Federal, 5% State, 1.45% Medicare, and 4.2%, pending federal legislation, for Social Security where applicable).
During the Spring of 2012, UPB will conduct overview sessions with more detailed information related to the taxation of tuition waivers. Additional communications will be forthcoming.
Questions regarding the new process can be addressed to UPB Customer Service at firstname.lastname@example.org or by calling one of these offices: UIUC 217-265-6363, UIC 312-996-7200, UIS 217-206-7211.
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