by Flex HR

Employee Student Loan Forgiveness May Be Taxed as Income in Certain States

If you’ve been following the news lately, you likely heard about the promise of $10,000 to $20,000 of your employees’ student debt being forgiven.

Yet, many are unaware that though the student loan forgiveness won’t be taxed as income on the federal level, it may be taxed at the state level in certain states.

To date, Indiana, Mississippi, and North Carolina have all announced they will tax the loan forgiveness. Other states that may follow suit include Arkansas, California, Minnesota, and Wisconsin. As many as 13 states may tax student loan forgiveness.

Woman Employee Student Loan Taxes


How This Impacts Your Employees

As an employer, you need to know how this affects your employees and their tax withholdings. First, if you are in one of the states mentioned above, you should alert your employees that they should change their tax withholding amount to account for the difference. They may even be pushed into a higher tax bracket!


Student Loan Forgiveness Taxes

However, if you are in one of the states that do not have state income tax, you won’t have to worry about this issue. Those states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

How to Help Employees Change Tax Withholding

If your employees need to change their tax withholding, the first thing they will need to do is fill out a new state W-4. However, they do not need to change their federal W-4.

Employees will need to fill out a new Employee’s Withholding Allowance Certificate and submit it to you.

Employee Taxes Student Loan Forgiveness

How HR Can Help

While Flex HR can’t assist in individual tax assessments or filings, we are happy to provide any withholding forms you need. We can work with your payroll platform to ensure all allowances are up to date.

As HR professionals, we also recommend that you encourage your employees to work with their accountants to withhold additional funds throughout the year.

The main takeaway is that employees may not be aware that they will be taxed on their student loan forgiveness, or they might not understand how to adjust their withholdings.

As Jessica Stafford, the Payroll Tax Manager at Flex HR advises, “Employers can advocate for their teams by ensuring they’re aware of this update and work with a personal accountant to determine their additional withholdings. As a full service payroll and HR provider, FlexHR can provide employers with the correct withholding forms for any employees in states collecting income taxes.”

Contact us now to get the solutions to maximize your HR needs today!