Are Stipends Taxable in California?

A stipend is a fixed sum of money paid to an individual to offset expenses during a period of learning or training, such as an internship, apprenticeship, or fellowship. These payments are common in academic and research settings. While they may feel like a gift, both federal and state tax authorities have specific rules that govern whether this money is considered taxable income. The tax implications are not always straightforward and depend on the specific purpose and conditions under which the stipend is provided.

Determining the Nature of Your Stipend

The tax treatment of a stipend hinges on its purpose. The Internal Revenue Service (IRS) and California’s Franchise Tax Board (FTB) categorize stipends into two primary types, and this classification dictates all subsequent tax consequences. The question is whether the payment is for services rendered or to support educational pursuits.

One category is a stipend paid as compensation for services. If you receive a payment in exchange for work you perform for the provider, it is treated like wages. For example, if an internship requires you to perform specific duties that benefit the organization, or a research position has set work hours and deliverables, the stipend is considered payment for your labor. This means you are providing a service in return for the payment.

The other category is a stipend given as a scholarship or fellowship grant to aid in study or research. These are “no-strings-attached” grants, where the primary purpose is to support the recipient’s education and training, not to pay for services. For instance, a fellowship that provides funds for a graduate student to focus on their dissertation without a requirement to teach or perform other duties for the university falls into this classification.

Federal Tax Treatment of Stipends

When a stipend is classified as compensation for services, the entire amount is considered taxable income by the IRS. This income is categorized as non-employee compensation, which the payer will report to you and the IRS on Form 1099-NEC. Because it is treated as earnings from work, this income is subject not only to federal income tax but also to self-employment taxes, which cover Social Security and Medicare contributions.

For stipends that are educational grants or fellowships, the tax treatment is more nuanced. According to IRS Publication 970, the portion of the stipend used for “qualified education expenses” is tax-free for degree candidates. Qualified expenses are limited to tuition and fees required for enrollment, as well as books, supplies, and equipment required for courses.

Any part of the stipend used for other costs, such as room and board, travel, or optional equipment, is considered taxable income. This taxable portion must be included in your gross income but is not subject to self-employment taxes.

California State Tax Treatment of Stipends

The taxability of stipends at the state level in California is determined by federal rules. The California Franchise Tax Board (FTB) conforms to the Internal Revenue Code’s definition of what constitutes gross income. This alignment simplifies the process for taxpayers, as the initial determination of taxability made for federal purposes carries over to the state tax return.

This conformity means that if a stipend, or any portion of it, is considered taxable by the IRS, it is also taxable for California state income tax purposes. For instance, if you receive a stipend for services and it is fully taxable federally, the entire amount is also subject to California income tax. Similarly, if you receive an educational grant and use part of it for non-qualified expenses like housing, that taxable portion must be reported as income on your California return.

Recipients must include this taxable income when they file their annual state tax return. For most residents, this means reporting the income on California Form 540, the Resident Income Tax Return.

Reporting Stipend Income and Paying Taxes

Reporting stipend income and paying the associated taxes is the recipient’s responsibility. Since taxes are not withheld from stipend payments, you must be proactive to meet your obligations to both the IRS and the FTB.

You are required to report all taxable stipend income, regardless of whether you receive a tax form from the payer. If the stipend was for services, the payer might issue a Form 1099-NEC, which reports the income to you and the tax authorities. If you receive a stipend for educational purposes, you are still responsible for tracking and reporting the taxable portion. This income should be reported on Schedule 1 of your Form 1040 as “Other Income,” with a note indicating it is for a scholarship or fellowship grant.

Because no taxes are withheld, you are required to pay taxes on this income as you receive it through estimated tax payments. This involves calculating your expected tax liability for the year and paying it in four quarterly installments to avoid an underpayment penalty. You make these payments to the IRS using Form 1040-ES, Estimated Tax for Individuals, and to the California FTB using Form 540-ES, Estimated Tax for Individuals. To avoid a penalty, you must pay at least 90% of the current year’s tax or 100% of the previous year’s tax. For higher-income taxpayers, the requirement increases to 110% of the previous year’s tax.