Can a Classical Conversations director gift an Independent Contractor or employee with free or reduced tuition?
A Classical Conversations (CC) Director can give educational benefits (i.e., discounts on tuition) to Independent Contractors (IC) or employees, but (and this is a big, “but”) the value of these educational benefits is taxable income and must be reported on their W-2 or 1099-MISC.
So a CC director can offer a tuition discount to an IC or employee, but must add the value of that discount to the tax reports she gives to her tutors (1099-MISC or W-2).
And the worker must report her paid wages and the value of this discount/gift on her tax return as taxable income. You should warn her about that in writing and face-to-face, so they aren’t surprised at tax time!
We think that taxable income is only what comes in a paycheck, but the IRS defines taxable compensation to include “educational benefits.”
compensation includes salary or wages, deferred compensation, retirement benefits…, fringe benefits (personal vehicle, meals, lodging, personal and family educational benefits, low interest loans, payment of personal travel, entertainment, or other expenses, athletic or country club membership, and personal use of your property), and bonuses.[i] (my emphasis added)
[i] Instructions for Form 1023 https://www.irs.gov/instructions/i1023/ch02.html#d0e1909
So, yes, a CC Director can offer free or reduced fees to an Independent Contractor or employee, but it is not a gift; it is taxable income and must be included in their wage and income reporting.
A CC Director should also check her license agreement with Classical Conversations to see if reduced fees are allowed.