Tax Implications of Head-of-School Compensation Packages

Fringe benefits included in head-of-school packages may help attract strong candidates, but be aware of compliance issues.

Apr 21, 2022  |  By Christopher S. Maynard, Klatzkin

Total compensation packages are on the rise for head of schools of independent schools. Heads of schools can easily make well over six-figure salaries, and that is before considering the value of additional fringe benefits offered by a school. Independent schools typically supplement a head’s salary with generous fringe benefit packages to attract and retain top talent. These benefits can include everything from housing, meals, transportation, use of facilities, tuition reimbursement and tuition reduction. These fringe benefits can increase the total compensation package for a head of school significantly.

Generally, the fair market value of a fringe benefit is taxable and must be reported as income. However, independent schools are responsible for properly report the value of the benefit on the head of school’s Form W-2 as the benefit may be subject to federal income and employment taxes. Therefore, a school needs to know which benefits are taxable and not.

IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits) outlines fringe benefits' reporting, valuation, and exclusion rules. The following is a synopsis of some of the more common benefits of head of schools:

Educational Assistance

Up to $5,250 of educational expenses can be excluded from income. This includes the cost of tuition, books, equipment, fees and supplies. It does not include the price of a class or other education involving sports, games, or hobbies unless the course is associated with the work done by the head for the school or is required as part of a degree.

Employer-Provided Vehicle

In the case of a school-owned vehicle provided to the head, the head must keep track of all personal use of the car, including commuting. Therefore, the value of the personal use portion, plus a fuel allowance of 5.5 cents per mile if the school is fueling the vehicle, would need to be added to the head’s reportable income. Note that commuting may not be an issue if the head’s housing is on campus.  

 

Meals

Schools with a cafeteria may allow their head of school to eat free of charge. For cafeteria meals to meet the exclusion requirements, the facility must be on or near the school’s campus, the meal must be provided during or around the normal hours worked, the revenue earned by the facility must equal or exceed direct operating costs on an annual basis, and most importantly, the meals must be offered to all eligible employees and cannot favor those that are highly compensated. 

No-Additional-Cost Benefits

No-additional-cost benefits are services or products the school offers to employees, either for free or at a discount, that do not incur a substantial additional cost in either labor or foregone revenue. To qualify as excludable from income, the product or service must be ordinarily provided by the school. This would include using the school’s athletic facilities and tickets to on-campus events such as lectures, plays, or athletic programs.

Tuition Reduction Expenses

Reduction in tuition for dependents of a head of school may qualify for exemption if certain conditions are met. Schools may offer anything from a percentage discount to a full tuition waiver. Depending on the circumstances, tuition reduction may be treated as a benefit, financial aid or compensation. The tuition reduction program may not discriminate in favor of highly-compensated employees. For example, suppose a head is only eligible to receive a full tuition waiver while other employees can only receive a partial tuition waiver. In that case, this remission would result in compensation that needs to be added in full to the head of school’s reportable wages.

Working Condition Benefits

A working condition benefit is any product or service that an employee could deduct as an ordinary and necessary business expense if they had to purchase it on their own. For example, working condition benefits for a head of school might include business-related club memberships, tickets to events, travel, electronic devices, professional dues and publications. These benefits are only excluded if they are directly related to the head of school’s work for the school.

There are various other IRS regulations regarding what should or should not be considered as income for a head of school or any school employee. Both the school and the head of school should keep up-to-date on the tax laws regarding fringe benefits, as they are complicated and change regularly. In addition, benefit plans that require testing of discrimination in favor of highly-compensated employees should be planned with experienced legal counsel specializing in these areas.

Christopher S. Maynard, CPA, is a partner with the accounting and advisory firm Klatzkin, where he serves as an advisor and auditor to independent schools and other nonprofit entities.

Author

Chris Maynard, CPA

Christopher S. Maynard

Partner, Klatzkin

Klatzkin

Newtown, PA

Christopher S. Maynard, CPA, is a partner with the accounting and advisory firm Klatzkin, where he serves as an advisor and auditor to independent schools and other nonprofit entities.

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