A Guide to Housing Benefits for Employees of Independent Schools

If independent schools want to provide a world-class education, they need to attract and retain top talent. One way to do that is to offer competitive compensation packages with in-demand benefits like employee housing. 

This can enhance employees’ quality of life while also supporting the school’s daily needs by increasing staff availability. However, it also has important tax implications. 

This article will explore the nuances of providing housing benefits and the factors that impact its taxability.

This article is the latest in a series that explores employee benefits for independent schools. View the other articles here:

• Employee Benefits in Independent Schools: Tuition
• Meal Benefits for Employees of Independent Schools: Key Tax Issues

School Employee Housing Benefits

Independent schools may offer housing benefits to employees for a number of reasons. 

Housing can boost recruitment, especially in areas with high costs of living, where it would be a significant expense for a prospective employee weighing a job offer. 

Additionally, housing is often a functional necessity, especially in residential schools, where employees must be present to supervise students at all hours. 

Types of housing benefits include: 

• Housing Allowances: Benefits such as stipends for employees’ rent or mortgages or reduced rent rates in off-campus, school-owned housing, offering flexibility in living situations. 
• On-Campus Housing: School-owned residences on-premises, often seen at boarding schools requiring round-the-clock staff presence. For example, a boarding school providing free housing to residential advisors and staff who must be available 24/7 to supervise students would likely meet the requirements for excluding this benefit from taxable income under Section 119(a). 
• Relocation Assistance: Short-term housing solutions for newly hired employees. For example, offering a one-time relocation stipend or providing temporary housing to a newly relocated employee.

The Internal Revenue Code provides two tests to determine whether such housing benefits are taxable or excludable from income.

1. Determining Housing Taxability with the Section 119(a) Test

Section 119(a) of the Internal Revenue Code lays out the requirements to exclude the value of employer-provided lodging from an employee’s taxable income. This is commonly referred to as “the 119(a) test.” The 119(a) test has three criteria that must all be met for the lodging benefit to be fully tax-exempt:

1. The housing is on the employer’s business premises.
2. The housing was established for the employer’s convenience.
3. The employee must accept the lodging as a condition of employment.

Failing any of the three criteria under 119(a) means the total value of the lodging must be included in the employee’s taxable income. Properly evaluating each part of the test is crucial for employers seeking tax-free housing benefits. 

2. The Section 119(d) Test for Qualified Campus Lodging

The difficulty in meeting the requirements laid out in 119(a) led to the introduction of 119(d) as part of the Tax Reform Act of 1986. The Section 119(d) test applies when schools own properties that they then rent to their employees, typically at a subsidized rate.

The 119(d) test applies to qualified campus lodging, even if it is not on-premises. The test evaluates whether the rent charged to employees is reasonable compared to the lesser of two figures:

1. 5% of the property’s appraised value or
2. Rent paid by non-employees for comparable housing

If rent meets this “reasonable” criteria, it may be excluded from taxable income. However, annual appraisals are required to maintain this status. If the rent the employee pays does not meet the criteria described above, all or a portion of the value of the housing the employee receives should be considered part of the employee’s taxable income. 

How to Report Housing Benefits 

Taxable housing benefits must be included in the employee’s reportable compensation on Form W-2. Non-taxable benefits can be reported separately:

• On Form 990: List the total non-taxable housing benefits provided in the “Other Compensation” section. Provide details in supplemental footnotes if desired.
• On Form W-2: Include housing benefits in Box 14 as a non-taxable fringe benefit.

Clear documentation, such as employment contracts specifying the housing benefit terms and conditions, is key. Schools should also maintain annual appraisal reports for any properties used in the 119(d) reasonable rent test.

Common Obstacles When Establishing Non-Taxability of Employee Housing

Satisfying the requirements to exclude housing from taxable income is often more difficult than one might expect. 

The “convenience of the employer” and “condition of employment” criteria under 119(a), as well as the “reasonable rent” test under 119(d), are all subject to strict interpretation by the IRS.

For example, in the 1983 case Winchell v. United States, the U.S. District Court for the District of Nebraska ruled that an employee’s requirement to be on-call did not meet the 119(a) requirements for the housing benefit to be excluded. This ruling set a precedent for future cases and highlights how the IRS applies a strict interpretation. 

In other words, simply having employees reside on-site or be available is unlikely to satisfy the convenience and condition tests alone.

For 119(d), schools must calculate reasonable rent using accurate, current appraisals and comparable rental data. Failing to meet the reasonable rent test can violate the 119(d) qualified campus lodging exclusion.

When attempting to apply either 119(a) or 119(d), schools must demonstrate a non-compensatory business rationale for why housing is necessary for the employees to carry out essential responsibilities. Vague claims about availability or on-call status are unlikely to meet the high bar set by cases like Winchell.

Clear, well-documented policies and employment contracts explicitly stating the business purposes and requirements around provided housing are crucial for supporting exclusion claims under either section. Because of the difficulty in satisfying these requirements, experienced tax professionals like Smith + Howard can be enormously helpful.

Smith + Howard: Experienced Advisors for Independent Schools

Attracting the best teachers and staff enables independent schools to provide their students with the best educational experiences possible. Through housing benefits, schools can improve their employees’ quality of life while also making it easier for them to fulfill their employment obligations. 

The tax nuances for these offerings can be complex, involving rigorous tests and strict reporting obligations. Understanding Sections 119(a) and 119(d) can help your school stay compliant and competitive. 

Smith + Howard’s Independent School Team can help you navigate these complicated requirements, whether you need help satisfying taxability requirements, telling your story with Form 990, or building a robust financial strategy to grow your school. 

Contact an advisor today to learn more about how Smith + Howard can help your independent school.