Just because you’re receiving money from an employing organization, doesn’t mean you’re on a salary. Many organizations offer stipends or living allowances rather than wages – and while money in your pocket is money in your pocket, there are some key aspects of stipends which are critical to understand.
If you’re paid with a stipend rather than a traditional salary, here’s what you need to know.
What is a Stipend?
A stipend is not intended to be direct compensation for work. Instead, a stipend is often designed to cover certain costs for the worker, such as housing and food. Stipends are not based on number of hours worked, but rather an overall agreement of labor to be completed. They’re usually smaller than an hourly minimum wage, as the money paid is meant to offset expenses rather than to provide a complete living wage. While a normal salary would increase over time, stipend amounts are almost always fixed for the length of a set contract and will not increase over time, or until a new contract is started.
Common stipend receivers include interns, research professionals, and graduate students, as well as volunteers doing occasional work for a non-profit organization or a religious group. A stipend may also be paid to a salaried employee during time spent training, in order to cover the extra cost of this education. In addition, many workplaces today have started to provide wellness stipends on top of a monthly salary, which employees can put toward a gym membership, tai chi classes, and so on.
Key Tax Information
Stipends have their own special tax rules, and it’s good to be aware of what these are so that you’re not surprised by an unexpected tax bill at the end of the year.
Because stipends are not a traditional wage, they aren’t subject to social security or Medicare taxes. However, the stipend still represents taxable income. This means you should be prepared to report your stipend earnings when filing taxes. Moreover, employers usually don’t withhold taxes on stipend checks, so you may need to pay this later in the year. In other words – be sure a portion of your stipend is reserved for taxes!
While it’s always a good idea to get tax advice from an expert if you’re unsure, the basics of stipends and tax returns are available on irs.gov. You can find specific information about fellowship and other grants here, which explains how stipend receivers should fill out their 1040 tax forms. Keep in mind that money from a stipend isn’t classified as 1099 or W-2 income, so don’t report it in that way, or you could be taxed too much. A financial or tax professional can explain more, and you should be able to ask tax questions to the organization providing you with your stipend.
Individual Retirement Accounts
If you’re earning a stipend rather than a traditional salary, you may be concerned about individual retirement savings – especially if you’re not at a typical job and therefore not currently eligible for the employer-sponsored 401(k). Putting away money into a tax-advantaged account is always a smart idea, but there are specific rules when it comes to contributing to your individual retirement accounts (IRA).
Only certain types of earned income can be put into an IRA; so for example if you inherit a sum of money, none of this is eligible for your account. But what about a stipend?
Until 2019, fellowship and training stipends were excluded from the IRA – however, new legislation has since changed this. The result is that today, you can contribute more types of stipends to a retirement account. Check in with the organization sponsoring your stipend to see if they have more information about what’s allowed for contributions. And while saving for retirement might not be at the top of your mind while living on a stipend, remember that tax-advantaged accounts are an important way to get the most value from your savings while also lowering your federal tax bill.
