Do College Students Have to Pay Internship Tax?

Internships are a stepping stone for college students, offering valuable work experience and potential employment pathways. However, understanding the tax implications of internships is essential for managing finances effectively and ensuring compliance with IRS regulations.

Paid vs. Unpaid Roles

The distinction between paid and unpaid internships significantly impacts both financial and tax considerations. Paid internships involve a formal employment relationship, where interns receive compensation in the form of a salary or hourly wage. This income is subject to federal and state income taxes, as well as Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA). Employers must provide a W-2 form to the intern, detailing wages and taxes withheld for filing their tax return.

Unpaid internships, by contrast, do not involve monetary compensation, which means they do not generate taxable income. These roles may instead offer academic credit or other non-monetary benefits. Students should familiarize themselves with the Fair Labor Standards Act (FLSA) guidelines, particularly the primary beneficiary test, which determines when an internship can legally be unpaid.

For unpaid interns, tax considerations may arise if they receive stipends or reimbursements. Stipends are generally considered taxable income unless explicitly designated for qualified educational expenses. Keeping detailed records of such payments and consulting IRS Publication 970 can help students understand how these funds are treated for tax purposes.

W-2 or 1099 Arrangements

Determining whether an intern should receive a W-2 or 1099 form depends on the nature of their working relationship. Interns classified as employees receive a W-2 form, indicating taxes have been withheld by the employer. This typically applies when the employer controls the intern’s schedule, work location, and specific tasks.

Independent contractors, on the other hand, receive a 1099 form, typically a 1099-NEC, which reports nonemployee compensation. These interns have more autonomy, often setting their own hours and working offsite. Independent contractors are responsible for self-employment taxes, which cover Social Security and Medicare contributions, calculated at 15.3% as of 2024. The IRS uses behavioral, financial, and relationship tests to determine the correct classification.

Withholding Requirements

Withholding requirements for internship earnings are essential for ensuring tax compliance. For employees, employers deduct a portion of earnings to cover federal and state income taxes, as well as other potential liabilities. This withholding is based on information provided on Form W-4 and is affected by the 2024 tax brackets and standard deductions.

Employers must calculate and remit these withholdings accurately to the IRS and state authorities. For example, a single filer earning up to $11,000 annually in 2024 falls into the 12% federal income tax bracket. Local jurisdictions may impose additional withholding requirements, such as New York City’s local income tax, which impacts interns working within the city.

Key Filing Obligations

Filing taxes as a college intern requires understanding income thresholds and applicable tax forms. Whether an intern files as a dependent or independent taxpayer on their parents’ return can influence their filing obligations. The IRS allows dependents to earn a certain amount before filing is required, such as $12,950 in 2023 for unearned income or $1,150 for earned income. These thresholds are subject to change, so staying informed about IRS updates is important.

For those required to file, Form 1040 is commonly used. Interns should also be aware of additional schedules like Schedule C for reporting self-employment income. Taking advantage of available credits and deductions, such as the Lifetime Learning Credit or the American Opportunity Tax Credit, can help reduce tax liability and maximize potential savings.