Is a stipend considered earned income?

Tax season brings plenty of questions, but few cause as much confusion as the status of employee stipends. 

If you're offering monthly wellness allowances, remote work stipends, or professional development funds, you need to understand how these benefits affect both your company's tax obligations and your employees' take-home pay. The distinction between earned income and other types of compensation isn't just about accounting for the subtle nuances; it directly impacts payroll processing, withholding requirements, and year-end reporting.

The answer to whether stipends count as earned income isn't straightforward because not all stipends are created equal. A housing stipend for relocated employees follows different rules from a fitness reimbursement program. An educational assistance allowance has different tax implications than a general wellness benefit. These distinctions matter because they determine whether you'll withhold taxes, how you'll report the payments, and what documentation you'll need to maintain.

This article talks about the tax treatment of various stipend types, helping you work your way through IRS guidelines with confidence. We'll discuss specific scenarios, explain key exceptions, and provide practical guidance for structuring stipend programs that benefit both your organization and your employees. 

Key takeaways

• Stipends are fixed payments meant to support education, training, or employee well-being, not compensation for direct labor.
• Most stipends are taxable, even without tax withholding, and must be reported on a tax return using Form W-2 or 1099-MISC.
• Stipends generally do not count as earned income for tax credits like the EITC, unless reported as wages on a W-2.
• Tax-exempt stipend exceptions include qualified education expenses and specific government programs; all others likely require tax reporting.
• Misclassified stipends can lead to reporting errors, penalties, or denied credits, making proper documentation and guidance essential.
• Forma helps employers manage stipends with automated compliance, tax documentation, and employee education. <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">Schedule a demo</span> to simplify your program.

What is a stipend?

A stipend is a fixed sum of money paid to individuals to help offset expenses while they pursue education, training, or service opportunities. Unlike a salary tied to hours worked or services provided, a stipend aims to defray living costs and enable recipients to focus on their learning or mission.

Stipend amounts are predetermined and not contingent on the quantity or quality of work performed. They are often lower than a traditional salary because the primary purpose is to support the recipient's growth and development rather than to compensate for labor.

Examples of stipends

Stipends come in various forms, each with its own purpose and tax implications. Some common examples include:

1. Wellness stipends: These are monthly or quarterly allowances that employees can use to invest in their physical or mental health. Funds can go toward fitness classes, gym memberships, therapy sessions, meditation apps, or even wellness retreats.
2. Learning and development stipends: Designed to support professional growth, these stipends cover courses, certifications, conference fees, or subscriptions to learning platforms. Instead of managing one-size-fits-all training programs, companies can empower employees to direct their own development paths
3. Remote work stipends: To help employees maintain a productive home office setup, companies can offer a recurring stipend for remote work expenses. This can include internet costs, ergonomic equipment, lighting, or noise-canceling headphones. Through a Lifestyle Spending Account, employers can keep these expenses organized and compliant while giving employees the tools they need to succeed from anywhere.
4. Family and caregiving stipends: Employers who want to support parents or caregivers can offer a stipend that offsets the cost of childcare, elder care, or family-related services. These funds might be used for daycare, after-school programs, or backup care services.

How are stipends taxed?

The tax treatment of stipends can be complex, depending on the specific type of stipend and how the funds are used. These distinctions are important to avoid unexpected tax liabilities or penalties.

Taxable stipend income

Most stipends are considered taxable income by the IRS. This means that even if taxes aren't withheld from your stipend payments, you're still responsible for reporting the income on your tax return and paying any taxes owed.

Stipends that are paid in exchange for services, such as teaching or research assistantships, are typically treated as regular earned income. If you receive a stipend as an employee, your employer should withhold income taxes and issue you a Form W-2 at year-end.

However, many stipend recipients are classified as non-employees or independent contractors. In these cases, the payer usually doesn't withhold taxes from the stipend. Instead, you'll receive a Form 1099-MISC if your total payments exceed $600 for the year. You'll need to report this income on your tax return and pay self-employment taxes in addition to income taxes.

Tax-exempt stipends

Some stipends may be partially or fully tax-exempt if they meet certain criteria. Scholarship and fellowship stipends, for example, are tax-free if they cover qualified education expenses like tuition, fees, books, and required course materials. However, any portion of the stipend used for room and board or other living costs is considered taxable income.

To claim the tax exemption, you must be a candidate for a degree at an eligible educational institution. The stipend must also not be contingent on providing services, such as teaching or research. If you're required to work in exchange for the stipend, the full amount is likely taxable.

Certain government benefit stipends, like those provided by AmeriCorps or the Peace Corps, may also be tax-exempt. These programs often structure their stipends to meet the requirements for qualified scholarships or living allowances. But, it's important to review the specific terms of your program to determine the tax treatment.

Reporting stipend income

If you receive a taxable stipend, you'll need to report it as income on your tax return. The exact reporting method depends on how you're classified by the payer and the forms you receive.

For non-employee stipends over $600, you should receive a Form 1099-MISC from the payer. You'll report this income on Schedule C of your tax return as self-employment income. This means you'll also be responsible for paying self-employment taxes, which cover your Social Security and Medicare contributions.

If you're paid a stipend as an employee, your employer will issue a Form W-2 at year-end. Your stipend income will be included in the wages reported on this form, and any taxes withheld will be credited against your tax liability.

It's important to keep accurate records of your stipend payments and related expenses. If you use any portion of your stipend for qualified education or work-related costs, you may be able to claim deductions to offset some of the taxable income.

Stipends vs. earned income: Key differences

While both stipends and earned income provide financial support, they have distinct characteristics that impact your taxes and employment status.

Earned income characteristics

Earned income refers to money you receive in exchange for work performed. It includes:

• Wages, salaries, and tips from employment
• Net earnings from self-employment
• Taxable employee compensation, such as bonuses or commissions

This type of income establishes an employee-employer relationship and is subject to payroll taxes and withholding. Your employer will issue a Form W-2 reporting your earned income at year-end.

Stipend characteristics

In contrast, stipends are fixed payments that aren't directly tied to services rendered. They are often provided to support individuals during periods of education, training, or service. Key characteristics of stipends include:

• Predetermined amounts not contingent on hours worked or tasks completed
• Typically lower than market-rate salaries for similar work
• Often no formal employee-employer relationship or benefits

Stipends are commonly offered in academic, nonprofit, and government settings. Examples include research fellowships, internship allowances, and volunteer living stipends.

Tax implications

The tax treatment of stipends and earned income differs in important ways:

• Earned income is subject to payroll taxes (Social Security and Medicare) and income tax withholding by your employer. You'll receive a Form W-2 reporting your taxable wages.
• Stipends are often considered taxable income, but the payer usually doesn't withhold taxes. You may receive a Form 1099-MISC if your stipend exceeds $600 in a year, and you're responsible for calculating and paying estimated taxes.
• Some stipends, like those for qualified education expenses or certain government programs, may be partially or fully tax-exempt. However, any portion used for living expenses or in exchange for services is likely taxable.

Determining whether your payments qualify as earned income or a stipend is a necessary step for accurate tax reporting and compliance. If you're unsure about the nature of your income, review the terms of your program or consult a tax professional for guidance.

Are stipends considered earned income for tax credits?

Stipends and earned income are treated differently when it comes to eligibility for tax credits. The IRS has specific rules about what qualifies as earned income, and most stipends don't meet those criteria.

The Earned Income Tax Credit (EITC), for example, is a valuable credit for low to moderate-income workers. But, to claim the EITC, you must have income from employment or self-employment. Stipends reported on a 1099-MISC form, which is common for research fellowships or internship allowances, cannot be used to calculate your EITC.

There are a few exceptions where stipends may qualify as earned income for tax credits. If you receive a stipend as part of a work-study program and your wages are reported on a W-2 form, that income may be considered earned income for the EITC and other credits. Though, this is relatively rare, as most work-study payments are not taxable income.

It's important to review the specific terms of your stipend and how it's reported to understand its impact on your tax credit eligibility. Don't assume that all income, including stipends, will qualify you for credits like the EITC, Child Tax Credit, or American Opportunity Credit.

If you're unsure whether your stipend counts as earned income, consult the instructions for the relevant tax credit or seek guidance from a tax professional. They can help you determine your eligibility based on your unique circumstances and ensure you claim all the credits you deserve.

Reporting stipends on your tax return

When you receive a stipend, it's important to understand how to report this income on your tax return. The process involves determining the taxable amount, including it in your gross income, and potentially paying self-employment tax.

Determine taxable amount

The first step is to review any 1099-MISC or W-2 forms you receive related to your stipend. These forms will report the total amount paid to you during the tax year. If you receive a W-2, your employer has likely already withheld taxes from your stipend. However, if you receive a 1099-MISC, you'll be responsible for calculating and paying taxes yourself.

Next, confirm if any portion of your stipend is tax-exempt. If you used the funds for qualified education expenses, such as tuition, fees, and required course materials, that portion may be exempt from taxes. Keep records of your expenses to substantiate the tax-free treatment.

Include in gross income

Once you've determined the taxable amount of your stipend, you'll need to report it as part of your gross income on your Form 1040. Add the taxable stipend to any wages, salaries, and tips you earned during the year. This total represents your earned income, which is subject to income taxes and potentially self-employment taxes.

Pay self-employment tax

If you receive a 1099-MISC for your stipend, you may be considered self-employed in the eyes of the IRS. This means you'll need to pay self-employment tax, which covers your Social Security and Medicare contributions. To calculate this tax, complete Schedule SE and attach it to your Form 1040.

One advantage of paying self-employment tax is that you can deduct half of the amount on your 1040. This deduction helps lower your taxable income and reduces your overall tax liability.

Manage quarterly estimated payments

When you have self-employment income from a stipend, you may need to make quarterly estimated tax payments to avoid underpayment penalties. The IRS expects you to pay taxes as you earn income throughout the year, rather than waiting until the filing deadline.

To manage these payments, use Form 1040-ES to calculate your estimated tax liability for the year. Divide the total by four and make payments in quarterly installments. Be sure to keep track of your payments and report them on your tax return.

If you're unsure about the tax treatment of your stipend or need help navigating self-employment taxes, consider working with a tax professional. They can ensure you're reporting your income correctly and taking advantage of any available deductions or credits.

Closing thoughts — Making stipends easier with a third-party administrator

Getting stipend taxation right requires more than just understanding IRS guidelines. It demands ongoing communication between HR, payroll, and employees throughout the year. Employers must clearly explain which stipends are taxable, provide accurate W-2 reporting, and maintain detailed documentation for potential audits. 

Meanwhile, employees need timely information about their tax obligations, especially when stipends push them into different tax brackets or affect their withholding calculations. One miscommunication about a wellness stipend's tax status can lead to confused employees, amended returns, and compliance headaches that nobody wants to deal with come April.

The complexity multiplies when you're managing different types of stipends across multiple states or countries, each with their own tax regulations. This is precisely why many organizations turn to specialized third-party administrators who understand these nuances inside and out.

Forma eliminates the guesswork from stipend administration by handling all tax compliance and communication on your behalf. 

Our platform automatically categorizes stipends according to current tax law, manages proper withholding for taxable benefits, and generates compliant tax documentation for both employers and employees. 

But we go beyond just software. Our dedicated support team fields employee questions about their stipend tax implications, provides clear guidance during tax season, and ensures your HR team never has to become tax experts themselves. 

With Forma managing programs like Lifestyle Spending Accounts, Health Spending Accounts, and various pre-tax benefits across 100+ countries, you can offer competitive stipend programs while staying fully compliant. Our 98% customer retention rate reflects how much companies value having a partner who makes complex benefits simple. 

<span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">Schedule a demo</span> to learn how Forma can handle your stipend administration from setup through tax season.

*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.

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