Are stipends taxable? Everything you need to know in 2024

Are you wondering if stipends are taxable income? Unlike your salary, the answer here isn’t a simple yes or no.

Stipends are taxable in some specific instances only. It depends on the type of stipend and how it’s used.

Let’s dive into the details to help you understand the tax implications of stipends.

Are stipends taxable?

Most stipends are considered taxable income by the IRS. This means that if you receive a stipend, you’ll likely need to report it on your tax return and pay taxes on the amount.

However, certain stipends may be tax-free up to IRS-designated annual contribution limits. To qualify for tax-free treatment, the stipend must be used for specific purposes, such as education or commuting expenses.

To make stipends tax-free, employers must establish an accountable plan and follow IRS guidelines. This involves setting clear rules for how the stipend can be used and requiring employees to provide documentation of their expenses.

Taxable stipends

• Wellness stipends: Stipends for gym memberships, fitness classes, or wellness products are considered taxable income.
• Health stipends: If your employer provides a stipend to help cover the cost of health insurance or medical expenses, it’s generally taxable.
• Remote work stipends: Stipends for home office equipment, internet service, or other remote work expenses are taxable unless they meet specific IRS criteria.

Tax-free stipends

• Commuter benefits: Employers can provide up to $300 per month tax-free for transit passes or commuter highway vehicles and up to $300 per month for parking.
• Education assistance: Employers can offer up to $5,250 per year per employee tax-free for educational expenses, such as tuition, books, and supplies.

How are stipends taxed?

If you receive a taxable stipend, your employer is responsible for withholding taxes. The tax rate for stipends is your regular income tax rate, or your employer can withhold 22% of the value. This 22% flat rate applies to all supplemental wages if you earn less than $1 million annually. However, if you earn over $1 million, your employer must use a 37% flat rate.

Keep in mind that in addition to federal income tax, you may also owe state and local taxes on your stipend. Your employer should withhold these taxes as well, based on your location and tax bracket.

Calculating taxes on stipends

If your employer doesn’t withhold taxes on your stipend, you’ll need to calculate and pay the taxes yourself. Here’s how you can do that.

• Determine the taxable amount: First, find out how much of your stipend is taxable. If you’re unsure, check with your employer or consult a tax professional.
• Locate your tax bracket: Your income tax bracket is based on your total taxable income, including your stipend. The higher your income, the higher your tax rate.
• Subtract your deductions: You may be able to reduce your taxable income by taking deductions, such as for charitable contributions or mortgage interest.
• Calculate your income tax: Apply the tax rate for your bracket to your taxable income, including your stipend. This will give you the income tax you owe.
• Set aside withholding or estimated tax payments: If your employer doesn’t withhold taxes from your stipend, you may need to make estimated tax payments throughout the year to avoid a penalty.

Stipend vs salary: What’s the difference?

While stipends and salaries may seem similar, they have distinct differences in terms of how they’re paid and taxed.

• Stipends are not considered compensation for work: Unlike a salary, which is a set amount paid for work performed, a stipend is monetary support for expenses or training. Stipends are often used to cover costs like living expenses, travel, or education.
• Stipends are typically lower than minimum wage: Because stipends are not regulated by the state, they can be lower than minimum wage. Employers have discretion over the amount of the stipend and how it’s paid.
• Stipends are often paid in addition to a salary: In some cases, you may receive a stipend on top of your regular salary. For example, if you’re required to travel for work, your employer may provide a travel stipend to cover your expenses.

The difference between stipends and salaries can impact how they’re taxed.

While salaries are always considered taxable income, stipends may be tax-free if they meet certain IRS criteria. However, most stipends are taxable and must be reported on your tax return.

Here’s how stipends and salaries compare side by side:

How to administer compliant taxable employee stipends

If you’ve decided to offer taxable stipends to your employees, it’s important to administer them correctly to remain compliant with IRS regulations.

• Determine the value of fringe benefits by January 31: Employers must calculate the total value of taxable stipends paid out to employees by January 31 of the following year. This amount should include all stipends provided, such as wellness, health, or remote work stipends.
• Choose a method for tax withholding: Employers have two options for handling taxes on taxable stipends. The first is to provide employees with a 100% reimbursement and then withhold taxes later on their W-2 using imputed pay. This means adding the stipend amount to the employee’s taxable income and withholding taxes accordingly. The second option is to treat the fringe benefit’s value as a bonus for the payroll cycle and withhold all applicable taxes immediately.
• Use the correct tax rates: For taxable stipends, employers should use the employee’s regular income tax withholding rate or the standard federal income tax rate of 22%. This 22% flat rate applies to supplemental wages if the employee earns less than $1 million annually. In addition to federal income tax, employers must also withhold Medicare, Social Security, and FUTA taxes on taxable stipends.

Understanding what a stipend is and how it works is key to designing a compliant and effective stipend program. Stipends can be a valuable tool for attracting and retaining top talent, but it’s crucial to follow IRS guidelines to avoid penalties and ensure your employees are properly compensated.

Are Stipends Worth It for Employers?

• Stipends can be a powerful recruitment and retention tool. In today’s competitive job market, offering a comprehensive benefits package that includes stipends can set your company apart. Stipends demonstrate your commitment to employee well-being and professional development, making your organization more attractive to top talent.
• Stipends can boost employee satisfaction and productivity. When employees feel supported and valued, they’re more likely to be engaged and productive at work. Offering stipends for wellness, education, or remote work expenses shows that you care about your employees’ needs and are willing to invest in their success. This can lead to higher job satisfaction, lower turnover, and increased productivity.
• Stipends can be cost-effective for employers: While offering stipends does come with a cost, it can be more affordable than providing a blanket salary increase. Stipends allow you to target specific needs and expenses, ensuring that your investment is being used effectively. Plus, if you structure your stipend program correctly, you may be able to offer tax-free stipends, saving both you and your employees money.

However, it’s important to understand the tax implications of stipends and administer them correctly to avoid penalties. Employers must determine which stipends are taxable, calculate the value of fringe benefits, and withhold taxes appropriately. Failing to comply with IRS regulations can result in fines and legal issues.

When deciding whether to offer stipends, consider your company’s goals, budget, and employee needs. Employee surveys and focus groups can help you identify which stipends would be most valuable to your team. You should also consult with a tax professional or benefits administrator to ensure that your stipend program is compliant and effective.

Contact Forma today for more advice on offering stipends

Ultimately, stipends can be a worthwhile investment for employers looking to attract and retain top talent, boost employee satisfaction, and support a positive company culture.

By carefully designing and managing your stipend program, you can reap the benefits while minimizing the risks.

Navigating the complexities of stipends and their tax implications can be challenging. Forma simplifies this process for you, ensuring your stipend programs are compliant and beneficial for both you and your employees.

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_{*This document is for informational purposes. Forma is not engaged in the practice of law. Nothing contained herein is intended as tax or legal advice nor to replace tax or legal advice from counsel. If you need tax or legal advice, please consult with counsel or a certified tax professional.}