How Does Stipend Pay Work & Is It Taxable?

A stipend represents a fixed sum of money provided to an individual, typically to cover living expenses, educational costs, or other specific needs. It differs from traditional wages or salaries, which are direct compensation for services. Stipends are a financial allowance, not payment tied to an hourly rate or specific job duties.

Understanding Stipends

A stipend is a predetermined amount of money given to an individual, functioning as financial aid rather than direct compensation for specific tasks or hours worked. This form of payment differs from wages or a salary, which are regular payments for employment with associated legal benefits and obligations. Unlike salaries, which are subject to standard payroll deductions and minimum wage laws, stipends are often not considered “employment” income.

Common scenarios for stipend use include academic settings, where graduate students, fellows, or researchers receive stipends for studies or research. For example, a university might provide a stipend to a PhD student to cover living costs while they complete their dissertation. Interns or apprentices also frequently receive stipends to offset expenses during training periods, allowing them to gain experience in fields that lack traditional compensation. Additionally, organizations may offer stipends to employees for specific purposes such as professional development, wellness initiatives, or for remote work expenses.

A stipend’s purpose often dictates its tax treatment. Some stipends are one-off payments, while others are provided regularly, such as monthly or quarterly.

Tax Implications of Stipends

The Internal Revenue Service (IRS) considers most stipends taxable income unless specifically excluded by law. Recipients must report the stipend amount on their tax returns and owe taxes. Taxability depends on the funds’ purpose and whether services are required for payment.

Certain stipends, qualified scholarships and fellowships, may be tax-free if used for specific educational expenses. These “qualified expenses” include tuition, fees, books, supplies, and equipment required for enrollment or attendance. However, for a scholarship or fellowship to be non-taxable, the funds must not represent payment for teaching, research, or other services as a condition of the grant. For instance, if a graduate student receives a stipend that covers tuition and required fees, and no services are rendered, that portion is tax-exempt.

Conversely, stipends are taxable if used for living expenses, even for students. This includes room and board, travel, or other personal living expenses. Any portion of a scholarship or fellowship that is payment for services, such as teaching or research, is taxable income. For example, a stipend paid to a teaching assistant is taxable as compensation for services.

The taxability of a stipend can depend on its classification as independent contractor compensation. If a stipend is paid for services performed as a non-employee, it is taxable, and the recipient may be responsible for self-employment taxes, covering Social Security and Medicare. Even without employer withholding, recipients must report taxable stipends and pay due taxes.

Reporting Stipend Income

Recipients of stipends are responsible for reporting income to the IRS, even if they do not receive a tax form from the payer. Educational institutions often issue Form 1098-T, “Tuition Statement,” which reports qualified tuition and expenses, plus scholarships and grants. Box 5 of Form 1098-T shows total scholarships or fellowships administered by the institution. However, the 1098-T primarily reflects qualified educational expenses and may not fully capture the taxable portion used for non-qualified expenses, like living costs.

For stipends considered non-employee compensation for services, if $600 or more, the payer might issue Form 1099-NEC, “Nonemployee Compensation.” If a stipend is reported on Form 1099-NEC, the IRS expects it reported as self-employment income on Schedule C (Form 1040), “Profit or Loss from Business.” In some cases, a Form 1099-MISC, “Miscellaneous Information,” might be issued, with the stipend in Box 3 as “Other income.”

Taxable scholarship or fellowship income not reported on a Form W-2 should be reported on Schedule 1 (Form 1040), “Additional Income and Adjustments to Income,” on Line 8z, as “other income.” Tax preparation software guides users to input this as taxable scholarship or fellowship income. If a stipend is determined to be self-employment income, the recipient would report it on Schedule C, allowing deduction of business expenses. Recipients must track and report taxable amounts, as received forms may not fully reflect the taxable portion.