Are student loan repayment benefits subject to employment taxes?
Yes. Because a student loan payment owed by the employee is made by the Federal Government on behalf of the employee, the payment is includible in the employee’s gross income and wages for Federal employment tax purposes even though it is made directly to the loan holder. Consequently, the agency must withhold and pay employment taxes from either the employee’s regular wages, the loan payment, or a separate payment made by the employee. The applicable employment taxes include Federal income taxes withheld from wages (and, where appropriate, State and local income taxes) and the employee’s share of Social Security and Medicare taxes. Tax withholdings must be deducted or applied at the time any loan payment is made. (See 5 CFR 537.106(a)(6).) The agency may choose among several different methods for withholding taxes. (See Questions and Answers on Tax Liability.) Please note the implications of deducting taxes directly from a gross loan payment. For example, if the agency has approved a student loan repayment benefit of $10,000 and the employee’s tax deductions are $3,000, then the agency will make a loan payment of $7,000. The full $10,000 counts toward the maximum limitations described in question #4.