Employer adoption assistance explained.

The core rule

Publication 15-B (2026) says you must exclude all payments or reimbursements you make under an adoption assistance program for an employee’s qualified adoption expenses from the employee’s wages subject to federal income tax withholding. In the same sentence it adds the catch: you cannot exclude these payments from wages subject to social security, Medicare and FUTA taxes. Table 2-1 shows the benefit as “Exempt” for income tax withholding (with footnotes for S corporation shareholders and highly compensated employees under a program that favors them) and as “Taxable” for both social security and Medicare and for FUTA.

That split is the main thing to understand about this benefit. An employee does not see income tax withheld on the assistance, but both the employee and the employer still owe FICA on it, and the employer owes FUTA.

What makes an adoption assistance program

The publication defines an adoption assistance program as a separate written plan of an employer that meets all of the following requirements.

1. It benefits employees who qualify under rules you set up, which do not favor highly compensated employees or their dependents. Employees under a collective bargaining agreement can be disregarded if there is evidence adoption assistance was a subject of good-faith bargaining.
2. It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents), where an owner holds more than 5% of the stock or capital or profits interest on any day of the tax year.
3. You give reasonable notice of the plan to eligible employees.
4. Employees provide reasonable substantiation that the payments or reimbursements are for qualifying expenses.

For 2026 a highly compensated employee for this exclusion is one who was a 5% owner at any time during the year or the preceding year, or who received more than $160,000 in pay for the preceding year; the pay test can be ignored for an employee who was not also in the top 20% by pay for the preceding year.

The 2026 dollar figure

The publication refers to “the $17,670 exclusion for 2026” in its W-2 reporting instruction. It does not restate the phase-out or the employee’s own exclusion mechanics, and it refers employees to the Instructions for Form 8839 and employers to Notice 97-9 (Internal Revenue Bulletin 1997-2) for more information on adoption benefits. If you need the employee-side credit, the site has a separate adoption tax credit calculator; that tool addresses the individual’s credit, while this page addresses what an employer does with payroll.

Reporting: box 12, code T

You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee for the year in box 12 of the employee’s Form W-2. The publication specifically says to report all amounts, including those in excess of the $17,670 exclusion for 2026, and to use code T to identify the amount. See the W-2 box 12 code lookup for the list of codes.

The reporting rule means the W-2 amount can exceed what is income-tax-free. The publication advises employees to see the Instructions for Form 8839 for their own treatment; the employer’s job under the publication is to report the full amount in box 12 and to exclude the payments from income tax withholding.

What this looks like on payroll: an illustration

This illustration applies the publication and is not an IRS example. An employer reimburses an employee $10,000 of substantiated qualifying adoption expenses under a compliant written plan. The employer does not withhold federal income tax on the $10,000 and does not include it in box 1 for that reason. It does withhold the employee’s share of social security and Medicare tax on $10,000 and pays its own share, and the $10,000 counts as FUTA wages. Box 12 on the employee’s W-2 shows $10,000 with code T. If the employer had instead paid $20,000, box 12 would show $20,000, because the publication says to report all amounts including those above the exclusion.

Cafeteria plans and S corporation owners

Adoption assistance is one of the qualified benefits that a cafeteria plan may include (see the cafeteria plan page). Do not treat a 2% shareholder of an S corporation as an employee for this exclusion; the publication says to treat the shareholder as you would a partner in a partnership for fringe benefit purposes. A 2% shareholder owns, on any day of the tax year, more than 2% of the stock or more than 2% of the voting power, directly or indirectly.

Table 2-1 footnotes that apply

The adoption assistance row in Table 2-1 carries two footnotes. Footnote 2 says the exemption from income tax withholding does not apply to S corporation employees who are 2% shareholders. Footnote 3 says the exemption does not apply to certain highly compensated employees under a program that favors those employees. These footnotes are why the program tests above matter: a plan that favors highly compensated employees loses the withholding exemption for them, and an S corporation 2% shareholder is outside the exemption altogether.

Substantiation and records

Because the program test requires reasonable substantiation that payments or reimbursements are for qualifying expenses, keep the documentation that the plan requires. The publication does not itemize which expenses qualify; it points to Notice 97-9 and the Form 8839 instructions. Do not guess at the list from this page.

Pub 15-B fringe benefits at a glance

Other pages in this set

De Minimis Benefits, Achievement Awards, Educational Assistance ($5,250), Dependent Care Assistance, Meals on Business Premises, No-Additional-Cost Services, Cents-per-Mile Valuation Rule, Cafeteria Plan, Working Condition Fringe, Lodging on Business Premises.

Sources

• IRS Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits: section 2, Adoption Assistance; Table 2-1; section 4 reporting. Page last reviewed April 30, 2026. Read November 2, 2026.

Every dollar figure on this page is a 2026 figure from the publication unless a different year is stated. The IRS can change a publication at any time, and the publication, your plan documents and a payroll professional control over this page. This page restates the publication and does not extend it to facts it does not address.