Are Internships Taxed? What Students Need to Know
Understand the tax implications of internships, including compensation, withholding, and filing responsibilities for students.
Internships are a vital step for students transitioning into the professional world, providing valuable experience and networking opportunities. However, many students may overlook the tax implications of their internship compensation. Understanding these obligations is critical to avoid unexpected financial consequences.
Taxable Internship Compensation
Internship compensation, whether in the form of wages, salaries, or stipends, is considered taxable income under the Internal Revenue Code. This includes monetary compensation, which is subject to federal, state, and sometimes local taxes. Interns must report these earnings on Form 1040, the standard individual income tax return.
The classification of an intern as an employee or independent contractor significantly impacts tax treatment. Employees have payroll taxes, including Social Security and Medicare, withheld by their employers. Independent contractors, on the other hand, receive a Form 1099-NEC and are responsible for self-employment taxes, which combine the employer and employee portions of Social Security and Medicare, currently 15.3%.
Non-monetary compensation, such as housing or transportation allowances, is also taxable. Interns must report the fair market value of these benefits as income and maintain accurate records for reporting purposes.
Withholding Requirements
For interns classified as employees, employers are required to withhold federal income tax, Social Security, and Medicare taxes. The amount withheld for federal income tax depends on the information provided on the intern’s Form W-4. Completing this form accurately is essential to ensure the correct withholding amount and to avoid large tax bills or refunds during tax filing.
Independent contractors do not have taxes withheld and must instead make estimated tax payments, covering both federal income tax and self-employment taxes. These payments are typically due quarterly, and missing deadlines can result in penalties. Maintaining detailed records of income and setting aside funds for tax payments is essential.
Employers and interns should also be aware of state-level withholding requirements, which vary widely. Some states have reciprocal agreements that affect withholding for employees who live in one state and work in another. Understanding these agreements is necessary to ensure compliance and avoid penalties.
Stipends or Non-Wage Payments
Stipends, categorized as non-wage payments, require special attention. While they may not be subject to the same withholding rules as wages, stipends are still taxable income according to the IRS. Stipends used for educational purposes might qualify for exclusion under Section 117 of the Internal Revenue Code if allocated toward tuition or required fees.
If a stipend is provided in exchange for services, it must be reported as income. Employers should clarify whether stipends are intended as reimbursements for expenses or compensation for services. Interns should keep detailed records of how these funds are used, which may also assist in an IRS audit. Being aware of potential deductions or credits, such as the American Opportunity Credit, can help reduce tax liabilities.
State-Level Obligations
State tax obligations vary significantly and depend on the jurisdiction where the intern works. Some states do not impose an income tax, while others have progressive systems with multiple tax brackets. Interns should familiarize themselves with the tax rates and filing requirements specific to their state of employment.
Residency is a key factor in determining state tax obligations. Interns working in a state different from their home state may face dual tax liabilities. States rely on rules like the domicile rule or statutory residency tests to determine tax residency status. Interns should consult state tax statutes to understand these rules and may need to file tax returns in both their home state and the state of employment. Credits for taxes paid to other states can help mitigate double taxation, but understanding how these credits work is important.
Filing Responsibilities
Filing taxes as an intern can be challenging, especially for those doing so for the first time. Regardless of classification as an employee or independent contractor, all income must be reported accurately to the IRS and, if applicable, to state tax authorities. Filing requirements are determined by factors such as total income, filing status, and whether the intern is claimed as a dependent. For 2023, individuals under 65 must file a federal tax return if their gross income exceeds $13,850, though this threshold is lower for dependents.
Interns with multiple forms of income, such as wages reported on a W-2 and contractor payments reported on a 1099-NEC, must ensure all income is reported. Failure to do so can result in penalties or audits. For those with self-employment income, filing is required if net earnings exceed $400, even if total income falls below the standard filing threshold. Interns should also explore deductions, such as the standard deduction or education-related expenses, to reduce taxable income.
Timely filing is crucial. Federal tax returns are typically due by April 15, though extensions can be requested using Form 4868. State deadlines may differ, so interns working across state lines should track these dates carefully. Interns with self-employment income must also make quarterly estimated tax payments to avoid penalties. While online tax software and professional preparers can simplify the process, interns must review their returns carefully to ensure all income and deductions are properly accounted for.