To know Can my S Corp Pay my Student Loan….Read on this article…!
S Corp
S Corp is a corporation or limited liability company that legally undertakes to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Such corporations are called S Corp because they choose to be taxed under the provision of Sub Chapter S of Chapter 1 of the Internal Revenue Code. Corporations or limited liability companies that have become S-Corps enjoy certain tax exemption benefits.
Any corporation can legally choose to become an S Corp from the IRS. S Corp can be owned by a single individual, multiple individuals, or organizations. The owner of an S Corp is not considered an employee of the company, owners are called shareholders. An S Corp with a single shareholder can be called a CEO or the president. S Corp owners also enjoy certain benefits such as self-employment tax savings. This includes 15% tax savings on social security and Medicare.
The expansion of Section 127 of the IRC by the Coronavirus Aid, Relief, and Economic Security Act of 2020 also known as the CARES Act 2020, created a student loan repayment plan that awards $5250 annually as repayment for student loans from the period of its enactment until the 1st of January 2025. The CARES Act was enacted in 2020 in response to the economic downturn that followed the coronavirus pandemic.
The clear interpretation of section 2206 of the CARES Act which expands Section 127 of the IRC, created a tax-free provision for employers to provide their employee’s educational assistance or student loans assistance. The provision states clearly that employers can include the payment of student loans as part of educational assistance to their employees and provide the amount of $5,250 annually to this effect. These students loan can be provided without tax deduction from the employee and the employer gets to benefit from a reduction in the payroll tax.
There are very strict laid down qualifications to have before an employer can qualify for tax-free payments under section 127. The employer must have a written plan for education assistance, and importantly the employer or owner or shareholders do not qualify for this loan benefit. An owner or shareholder is only entitled to 5% of the total payable amount. Therefore, as an owner of an S Corp, on reliance on the exemption provision in Section 127, your S Corp cannot pay your student loan, because this benefit is only available for employees.
S Corporation v. Sole Proprietorship
The major difference between an S Corporation and a Sole proprietorship is that S Corps have a limited liability advantage and tax options. A sole proprietorship can file to become an S Corp, single membership S Corp are legal too. The difference between these two business forms is seen in how it relates to the provision of section 127, while the provision exempts a shareholder or business owner from benefiting from the student payment loan, a sole proprietorship that is run by an individual is under no obligation. A sole proprietor can apply for the student payment loan as an employee/owner of the business, but he/she would have to follow the laid down procedure to do so successfully.
Benefits of an S Corporation
There are many benefits that an organization or business stands to gain by transitioning into an S Corp one of the important benefits includes:
- Limited liability advantage; an S Corp gets the benefits of both a limited liability company and a partnership.
- Tax deductions/Tax options
- Tax savings on social security and Medicare (Self employment and Insurance)
- Planning for retirement
As an owner of an S Corp can I Pay my Student Loan?
Sadly, Section 127 of the IRC exempts business owners or shareholders from benefiting more than 5% of the total amount paid to employees as education assistance for student loans payment. Therefore, an owner of an S Corp cannot pay his student loan with his corporation. The benefit created was only for employees of businesses. The employer is required to pay annually a maximum sum of $5,250 as education assistance for student loans payment. To do so successfully the employer must draft out a written education assistance plan, publicize the benefits to other employees to ensure fairness, and must not discriminate. The payment of these student loans is tax-free for the employee, and the employer benefits from these as tax savings on the payroll tax.
Who Qualifies for the Student Loan?
Section 127 provides that employees of a company qualify for education assistance for the payment of student loans. Employees may include certain self-employed individuals, disabled employees, current employees, retired employees, or laid-off employees. But this does not include relatives or family members of the employee.
Conclusion
In conclusion, an S Corporation owner can not pay his/her student loan with his/she S Corporation, but as a sole proprietor, he/she stands a chance of benefitting from the annual student loan payment plan of $5,250. The student loan payment was included as part of educational assistance that can be paid by employers to employees. This student loan under the CARES Act 2020 has a temporary tax-free provision, which benefits both the employer and the employee.
Frequently Asked Questions
- What other education expenses qualify under Section 127?
Tuition for both undergraduate or graduate programs and books, student supplies (but does not include transportation, meals, or supplies kept by the employee after the course completion), and necessary equipment.
- What are some of the factors to consider when choosing student loans?
Students must consider the loan interest rates, the repayment term or duration, the option of repayment while in school, etc.
- What impact did the CARES Act have on Student Loans?
The CARES Act 2020 created a provision that encourages employers to give employees an annual sum of $5,250 for the repayment of student loans. This provision also came with a temporary tax exemption on the employer’s contribution to the repayment of the employee student loan. The tax exemption period is meant to last for five years starting from March 27th, 2020.
