Tax Issues to Consider When Investing in Training and Recruiting

A top concern for manufacturers is the shortage of skilled workers. There are various options to bridge the skills gap, but training and recruiting options often require a substantial investment. What’s the most cost-effective way for you to tackle this challenge?

Deducting training costs

Before looking outside your organization for skilled job applicants, consider your existing employees. Could any promising employees qualify for an open position with the right training?

In addition to any continuing education requirements, employees may want to advance their skill set or simply keep their skills up to date. Depending on the number of employees who would like to participate, employers might decide to offer a class onsite or online — or send employees to an offsite location for training.

For federal tax purposes, companies can generally deduct the cost of courses that employees attend to maintain professional or job-related skills. The write-off covers items such as tuition, books, supplies and certain travel costs. (There are some limits for owners on deducting the cost of education that isn’t job-related, however.)

Additionally, some employers offer tuition reimbursement programs for work-related education expenses. Typically, these reimbursements are a tax-free fringe benefit to employees (no income or employment taxes), and the employer can deduct the costs as business expenses.

Alternatively, if a company maintains an educational assistance plan, employees may be able to receive up to $5,250 in annual tax-free education benefits. The courses don’t have to improve or maintain job-related skills; they can lead to a new job, help the worker meet minimum requirements or just be educational. If you pay more than $5,250 in educational assistance benefits to an employee annually, he or she must generally pay tax on the excess amount.

Offering internships

If existing employees are unable (or unwilling) to fill a position, it’s time to look outside your company. Some manufacturers partner with local high schools, tech schools, community colleges and universities. Internships can be an affordable way to vet candidates and infuse your teams with fresh, new ideas. But you may still be required to offer a modest salary under state and federal labor laws. (See “Should you pay interns?”)

The bottom line is that interns who are paid and assigned meaningful work can be eager, productive team members. They’re also more likely to return to work for you as full-time employees — and spread the word to their friends.

Relocating new hires

For hard-to-fill positions, you may need to expand the search beyond your company’s geographic reach. And you might have to offer financial incentives to lure applicants. 

In addition to paying signing bonuses and premium salaries, relocation packages can help attract talent, especially to less populated areas. Typically, employers provide an advance for moving expenses with an agreement that the new hire will return any excess funds within a reasonable time period.

Reimbursed moving expenses made in accordance with the IRS rules for “accountable plans” are deductible as normal business expenses. The reimbursements are generally tax-free to the employee, too.

If a reimbursement arrangement doesn’t meet the IRS requirements for accountable plans, the reimbursement will be treated as “nonaccountable.” Payments made under nonaccountable plans are taxable compensation to the employee (subject to payroll and income taxes). However, the employee can offset the income on his or her personal tax return by deducting job-related moving expenses.

Bridging the skills gap

Looking for help attracting and retaining skilled workers? Contact your CPA advisors for creative, cost-effective solutions.

Sidebar: Should you pay interns?

A modest salary certainly helps attract applicants to your recruitment programs. But many companies wonder whether they’re legally required to pay interns for their services — or whether receiving on-the-job training or earning high school or college credit will suffice.

Under the Fair Labor Standards Act (FLSA), companies are generally required to pay at least minimum wage to employees. The FLSA applies to interns, too, unless they qualify for an exception.

Criteria the Department of Labor (DOL) uses to evaluate exceptions include the following:

• The internship is similar to training that would be given in an educational environment.
• The internship experience benefits the intern.
• The intern doesn’t displace regular employees, but works under close supervision of existing staff.
• The employer receives no immediate advantage from the activities of the intern, and, on occasion, its operations may actually be impeded by participation in the internship.
• The intern isn’t necessarily entitled to a job at the conclusion of the internship.
• The employer and the intern agree that the intern isn’t entitled to wages for the time spent in the internship.

The more of these points that apply, the stronger the case will be for exemption from the FLSA. Also ask your attorney about state laws and other regulations that pertain to internships.

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