Section 127 Plan: The $5,250 Tax-Free Bonus Business Owners Overlook

Let me ask you a question...

What if you could give your employees a $5,250 raise, without paying payroll taxes, and without your team paying income tax on it either?

Sounds too good to be true, right?

It’s not. It’s legit. And it’s one of the most underutilized tax strategies available to business owners right now.

Welcome to the world of Educational Assistance Programs and the power of Section 127 of the IRS Code.

What is a Section 127 Plan?

Under IRS Code Section 127, employers can provide up to $5,250 per year in educational assistance to employees on a tax-free basis. This typically covers tuition, books, and supplies for continuing education.

But thanks to a COVID-era update (that Congress extended through December 31, 2025), that definition now includes student loan repayment.

Yes, you read that right.

Employers can now pay up to $5,250 per year per employee toward student loan debt, and the payment is:

• Tax-free to the employee (no federal income tax owed)

• Exempt from payroll taxes for both employer and employee

• Fully deductible as a business expense

Why This Matters

Let’s be real: finding good people is tough. Keeping them is even harder. So when you can provide real value beyond a paycheck, especially something that helps with a major financial burden like student debt, you win.

Let’s look at an example.

Real-Life Example: The Tax-Free Bonus

Imagine you want to give your employee, Sarah, a raise. You consider giving her a $5,250 cash bonus.

Here’s what that looks like:

• Sarah will owe federal and state income taxes (likely around 22-30%).

• You’ll pay employer payroll taxes (~7.65%).

• She’ll pay her share of payroll taxes (~7.65%).

End result? Sarah might see about $3,300 in her pocket after taxes, and you might spend close to $5,700 when all is said and done.

But if you contribute that $5,250 as part of a Section 127 Educational Assistance Plan toward her student loans:

• You pay $5,250

• Sarah gets $5,250 applied to her loans

• Neither of you pays a penny in taxes on it

Boom. 

Same cost for you. More value for her. No taxes to either of you. Total win-win.

How to Set This Up In Your Business

The IRS does require that you follow a few simple rules:

1. Create a Written Educational Assistance Plan

   • This can be a simple document outlining who’s eligible, how the benefit works, and what expenses are covered.

2. Communicate the Benefit to Employees

   • Let your team know this is available, how to qualify, and how to request reimbursement.

3. Track and Reimburse Properly

   • Reimburse or pay directly to the loan provider (within 60 days of the expense is best practice).

   • Keep documentation and receipts.

4. Don't Discriminate

   • The plan must not favor highly compensated employees.

We created a full implementation checklist to walk you through this.

The Strategic Upside

This isn’t just about tax savings.

This is about being a better employer. A more competitive recruiter. And a business that shows employees you care.

According to recent surveys, student loan debt is one of the biggest stressors for working adults. In fact, many say they’d rather have debt assistance than a raise.

And here’s the best part: this strategy doesn’t require big corporate budgets or massive HR teams. It works for a 5-person team just as well as a 500-person company.

Real-World Case Study: The Boutique Firm That Retained Talent

One of our clients, a boutique marketing agency with 12 employees, implemented this plan in early 2023. 

Three of their key employees were carrying student loan balances over $40,000 each.

Instead of offering end-of-year bonuses, the firm contributed $5,250 toward each of their loans under the educational assistance plan. 

That year, they saved over $3,000 in payroll taxes and retained all three employees, two of whom had been considering leaving for bigger firms.

Sometimes, the smartest retention strategy isn’t more money, it’s more meaning.

A Limited-Time Window

Unless Congress extends it again, this opportunity ends December 31, 2025.

So now is the time to act. Set up your plan, educate your team, and take advantage of the window while it’s open.

Final Thought: Why Leave Money on the Table?

When the government offers you a way to:

• Lower your payroll taxes

• Give your team a raise

• Help them destroy debt

• And get a full deduction for doing it...

...why would you say no?

This is what a smart tax strategy looks like. This is what Make Taxes Fair is all about.

It’s time to make your business work better, for you AND your employees.

Now it's time to take action. If you have any questions, reach out and start a conversation.