TAX REMINDER: To Parents Who Receive a Child Care Tuition Grant Please note that if you receive a discount to your child care tuition in the form of a Child Care Tuition Grant, you may be required to pay federal and state income taxes as well as FICA taxes on a portion of the discount. Please read the following questions and answers below to determine your tax responsibility.
Question: Do I need to be concerned about the payment of taxes for a discount provided by the University of Michigan? Answer: If you are an employee at the University of Michigan, including a student employee, such as a GSI, the discount you receive on your child care tuition may trigger tax consequences. Question: When are discounts subject to taxes? Answer: Discounts in excess of 20% of the typical fee charged to the public are subject to taxation. Question: What amount of the discount results in taxable income and taxes to me? Answer: Because you are receiving additional payment from your employer in the form of a discount, you must pay tax on any discount in excess of 20% of the typical fee charged to the public. A 26% discount on an $850 tuition fee produces a benefit to you of $221. This $221 is paid directly to the child care center because it goes toward your tuition bill, but it is nevertheless money paid on your behalf and is, therefore, considered income to you. You, therefore, owe tax on 6% (26% less 20% of $850 or $51). The amount of estimated federal, state and FICA tax that you will have withheld from your paycheck on the 6% discount is approximately $13.77 (assuming a federal tax rate of 15%, a state tax rate of 4.35%, plus FICA tax rate of 7.65% as adjusted by Form W-4, Employee’s Withholding Allowance Certificate).
Question: If I receive a 20% discount on my child care tuition, do I owe any taxes on the discount? Answer: No. There are no tax consequences unless the discount is more than 20%. Question: How do I pay these taxes? Answer: The University payroll department will deduct from your next regular paycheck the amount necessary to pay the taxes. Importantly, you should budget for the reduced disposable income or “take home” pay accordingly.
If you have any additional questions, please contact the campus program in which your child is enrolled or Judy Collins at judymc@umich.edu or (734)647-7144:
Northwood Child Development Center 1000 McIntyre Ave. Ann Arbor, MI 48109 (734) 764-4557
U-M Children’s Center 400 N. Ingalls Building Ann Arbor, MI 48109-0492
(734) 763-6784
U-M Towsley Children’s House (formerly U-M Children’s Center-Working Families and Pound House) 710 S. Forest Ave. Ann Arbor, MI 48104-3117 (734) 998-7600
Oct 2007