Young workers who are just beginning their careers are often paid stipends -- relatively small amounts of money that defray (but do not cover) basic living expenses while they acquire expertise for a full-time job. But stipends also can be paid to full-time workers for a host of fringe benefits, from fitness clubs to home office furnishings.
What is a stipend?
A stipend can be a small amount -- less than minimum wage -- paid to a nonemployee for work that advances that person’s education. Typically, stipends are awarded to graduate students, research assistants, interns, or people being trained for a job. A stipend isn’t meant to be a living wage but is paid to defray expenses such as food, housing, and transportation.
Although the most common type of stipend is a small sum for someone who isn’t on a payroll, some salaried and hourly workers receive stipends for other reasons. Companies that want to recruit and retain good employees, for example, often will offer stipends for fitness centers, health insurance, wellness programs, home office furnishings, public transportation, parking, financial planning, office supplies, continuing education, or personal cell phone use (or, if you’re lucky, all of the above).
Stipend rules
Obviously, there are rules surrounding the use of stipends that prevent employers from circumventing minimum wage laws. A primary law governing stipends is the Fair Labor Standards Act[FB1], which requires for-profit employers to pay minimum wages and overtime pay to workers.
When it comes to students and interns, however, the courts have used a “primary beneficiary test” to determine if they’re actually employees. The test includes seven factors:
- Do both employer and intern/student understand compensation isn’t expected?
- Is the work similar to training that might be provided by an educational institution?
- Is the work tied to a formal education program, i.e., does the intern or student receive academic credit?
- Does the job correspond somehow to an academic calendar?
- Is the work limited to the period in which the intern or student is learning the job?
- Does the work complement or displace the work of current employees?
- Do both employer and intern/student understand that the completion of the work does not entitle anyone to a job at the end of the work period?
There are no hard and fast rules about how much a stipend can be, when one should be paid, or even what one should (or shouldn’t) cover. But for the best guidance on deciding whether someone is eligible for a stipend or should be on the payroll, consider whether the stipend recipient is learning on the job or taking an employee’s job.
There are also a few rules that stipend recipients should know. For example, since people who get stipends aren’t hourly or salaried employees, the employers don’t withhold income taxes or pay Medicare or Social Security taxes.
Stipends are often treated as taxable income, as well. One exception: If the stipend is used for qualified educational expenses[FB2], the payments don’t need to be reported to the IRS. Qualified expenses might include tuition, fees, and required books. Stipends used for nonqualified expenses, such as room and board, travel, and laptop computers, would be taxable, according to IRS rules.
Stipend examples
When it comes to stipends, different companies will have different needs. A San Francisco website, Spend My Stipend, found that the three most common types of stipends for employees (with their typical ranges) are:
- Professional development: $1,000 to $3,000 annually
- Health and wellness: $30 to $100 monthly
- Remote work: $50 monthly (recurring), plus $500 to $1,000 (one-time)
As a general rule, stipend programs are administered by a human resources or benefits department. Employers should set clear guidelines about their use; for example, it’s best for employers to preapprove continuing education programs to make sure that both employer and employee will benefit from additional training.
[FB1]https://www.dol.gov/agencies/whd/fact-sheets/71-flsa-internships
[FB2]https://taxdepartment.gwu.edu/taxation-scholarships-fellowships-stipends-0
