What Is a Stipend? Understanding This Often-Misunderstood Form of Income

Are you being paid a salary or do you receive a stipend? While money in your pocket is money in your pocket, there are a few key differences between earning a salary and earning a stipend—especially when it comes to raises, taxes and retirement savings. Read on to learn more about what it means to be paid via stipend.

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. When a new contract is started, a new stipend may be offered too.

People who often receive a stipend include graduate students, postdoctoral students, interns, research professionals, and some volunteers. 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

Many stipends are considered taxable income, which means they are subject to Social Security and Medicare taxes. Your employer may withhold these taxes from your stipend, in which case you’ll usually receive a W2 form when tax season rolls around. On the other hand, taxes might not be withheld—in which case you’ll receive a 1099 form and you may be responsible for paying your taxes directly.

Check in with your place of work about tax specifics. How will your stipend income be reported? What are you responsible for, in terms of paying taxes and reporting income? If taxes won’t be withheld in advance, make sure to reserve a portion of your stipend to cover the tax bill.

Do keep in mind that scholarships, fellowships and grants have their own rules. With a scholarship, fellowship or grant, you typically don’t need to pay taxes on funds received—but this can change depending on your academic standing and how the money is used. The IRS has more information here.

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. For example, if you inherit a sum of money, that inheritance is not eligible for your retirement account. But what about a stipend?

Until 2019, fellowship and training stipends were excluded from the IRA—however, this rule has since been changed. Today, most taxable stipend income is also eligible to be deposited into an individual retirement account. Still, it’s a good idea to check in with the organization sponsoring your stipend to see if they have any specific recommendations.