When Are Stipends Taxable and How Do They Work?
It's challenging to understand the tax implications of stipends. Learn everything you need to know in our complete guide.
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Tax season. Those two words cause panic, confusion, and even drooping eyelids. Nevertheless, if your company offers stipends, understanding your taxes is essential. This knowledge ensures you stay compliant and maximize every dollar you invest in your employee benefits package.
Whether you offer your team extra cash to cover meals, cell phone usage, health and wellness, or vacation expenses, stipends can significantly impact your tax obligations.
Are stipends taxable? Learn exactly how they work in our comprehensive guide, which unravels:
Stipends are historically associated with someone receiving payment as indirect compensation for their services. For example, non-profit organizations may offer a fixed amount to academic researchers, clergy members, or teachers as financial support that covers their basic living expenses. But nowadays, the corporate world has also adopted this model. Modern companies offer stipends as fringe benefits that employees receive as part of their total compensation package in addition to their regular salary.
The lack of administrative burden associated with stipends makes them a popular addition to the benefits space. Stipends are convenient as they’re paid upfront or regularly and don't require employees to part with their cash or file receipts in a long-winded reimbursement cycle.
In terms of tax, stipends typically fall into three classifications based on IRS Publication 15-B: The Employer’s Guide to Fringe Benefits.
Pre-tax benefits enable employees to keep more of their hard-earned money and give employers a tax break. The benefit is deducted from the employee’s compensation before taxes are withheld from the rest of their pay. This reduces the employee’s taxable wages overall.
Employers can offer certain non-taxable benefits without paying federal or state taxes. These are typically business expenses like de minimis benefits that employees need to perform their jobs. They differ from pre-tax benefits because they don’t need to be reported on employees’ W-2 forms. Companies can provide these benefits tax-free and claim deductions for the expenditures if they offer them to employees through an accountable plan. Accountable plans must follow three standards:
Download our free template for an example of an accountable plan.
Taxable benefits are any benefits or perks that don’t belong in the pre-tax or non-taxable categories. When the IRS classifies stipends as additional income, these are subject to taxation. Companies must list the benefit on employees’ W-2 forms and withhold state and federal taxes accordingly.
Stipends may be considered income in terms of withholding taxes—the distinction between them boils down to how they’re classified. Like other forms of compensation, they’re subject to Social Security and Medicare taxes unless they meet specific exceptions outlined in IRS Publication 15-B.
Stipends have become increasingly popular as companies find creative ways to provide benefits to their employees. Let’s explore some common categories of stipends and the tax implications of each.
Disclaimer: We’re not tax experts or accountants, so it’s always a good idea to consult a tax professional for personalized advice regarding your specific financial situation.
Health and wellness stipends are taxable benefits covering multiple aspects of mental and physical well-being.
Smaller organizations may be tempted to offer health insurance stipends in lieu of providing group health coverage or a health reimbursement arrangement. However, companies with 50+ employees must offer formal health coverage to satisfy the criteria in the Affordable Care Act.
For these mid to large-sized organizations, a wellness stipend is attractive to employees as it offers a more generous range of benefits that may not be available as part of their medical coverage. For example, these might include gym memberships, physical therapy, counseling, alternative treatments, health supplements, massages, and wellness products.
Add these eligible health benefit expenses (and more) to a lifestyle spending account and give employees the freedom to build their benefits plan based on what matters most to them.
Example: Reachdesk offers its employees $150 per month to spend on wellness expenses. Unused funds expire at the end of the quarter, motivating employees to choose from a range of products, classes, and programs.
Cell phone and home office stipends are incredibly valuable in our connected world, especially for remote or hybrid employees and frequent travelers. The IRS recognizes that we rely on our personal devices to complete work-related tasks like taking calls, emails, and accessing work apps.
Therefore, it allows employers to provide cell phone stipends covering expenses related to work, such as device costs or monthly cell plans. IRS 2011 933 states that employers must provide documentation to prove that cell phones are essential for employees to complete their work; by doing so, this stipend is a non-taxable benefit. Employers can also provide a phone stipend as a taxable benefit if they like.
Similarly, home office stipends help remote workers create a comfortable and functional workspace, covering expenses like office equipment, furniture, or noise-canceling headphones. These stipends are taxable, but there are exceptions if the employee can prove they’ve charged specific business expenses to the company.
Professional development stipends invest in your employees’ growth, skills enhancement, and career advancement. Also known as educational assistance stipends, these assist employees in acquiring new knowledge, improving their expertise, and staying relevant in their respective fields. Your team members might use them to attend conferences, workshops, and seminars or to complete courses and obtain industry certifications.
Employers can offer up to $5,250 per year per employee as a tax-free benefit. Any amount exceeding this threshold may be subject to regular income tax.
Travel stipends assist employees with expenses associated with personal travel and take the break from work they need to be productive. A company’s travel stipend might include the cost of travel tickets, accommodation, car rental, roaming data fees, visa and passport costs, entertainment or leisure budget, and more.
The IRS distinguishes between accountable and nonaccountable plans when classifying travel stipends. Employees must provide expense reports and documentation in an accountable plan, making the travel stipend non-taxable. An accountable plan is usually used for business travel such as attending meetings and conferences, or for travel-related roles such as travel journalists.
Personal travel is typically classed as a nonaccountable plan, which doesn’t require formal documentation but is therefore taxable.
Commuting stipends offset the cost of commuting for employees living some distance away from their workplace. Clever Real Estate reveals that the average U.S. commuter spends $8,466 each year on their commute, which is approximately 19% of their annual paycheck.
Note: Commuting is not the same as business travel. Commuting starts before and after the working day, while business travel happens as part of your work.
Stipends for commuting expenses such as fuel, parking fees, tolls, and public transportation may be pre-tax or post-tax depending on what you choose to cover. For example, IRS Chapter 132 outlines that employees may deduct parking and commuter expenses on a pre-tax basis, up to $300 per month for transit and $300 for parking. However, commuting costs like fuel or using a service like Uber or Lyft is considered a post-tax benefit.
We all need to refuel with healthy, nutritious food throughout the workday, and that’s where meal stipends come in handy. Employers can provide these stipends to cover food-related expenses like lunches, groceries, meal kits, food deliveries, or restaurant vouchers.
While most meal stipends are taxable, there’s an exception. If employees must remain on-site during their meal breaks, the stipend can be considered non-taxable under regulations outlined in Section 119 of The Internal Revenue Code.
Example: Wix employees receive a biweekly allowance to spend on food deliveries, groceries, dinner subscription boxes, and local restaurants.
Employees who hope to start a family can gain support from a Family Care and Formation account which offers support for fertility, adoption and surrogacy services. Taxation is complex for family formation benefits, with IRS Pub. 502 providing guidance that the following procedures may be considered part of your tax-deductible medical expenses only if required to overcome your, your spouse, or your dependent’s ability to have children:
For families with childcare needs, dependent care stipends can be a game-changer for working parents, covering the costs of daycare, preschool, after-school programs, or in-home care like nannies.
Another popular way for employers to distribute childcare stipends is through a dependent care flexible spending account (DCFSA). This benefit gives working parents the option to allocate a portion of their pre-tax salary toward childcare expenses. As a pre-tax benefit, they’ll also lower the income they pay taxes on. However, companies must make their employees aware of annual contribution limits. Currently, these are $5,000 per household or $2,500 if married and filing separately. The IRS does not limit the amount of childcare benefits you receive, only the amount that is tax-free. Anything above the $5,000 threshold becomes a taxable childcare benefit which is subject to the relevant federal tax rate.
Example: The Community Group offers flexible stipends upfront through a Benepass Lifestyle Spending Account. The company has designated “parent support” as an eligible expense category.
When employees must travel or relocate for work, companies can offer housing or lodging stipends to relieve the financial burden of moving house, paying rent, providing down payments, or more.
Any stipend covering actual housing expenses is generally considered taxable income.
Exception: If the employer provides a stipend as reimbursement for documented expenses incurred by the employee, it may be excluded from taxable income. Similarly, if a condition of employment is to live in furnished lodging on business premises, this is often a tax-free arrangement.
If the employer doesn’t deduct tax owed for stipends, the responsibility falls on the stipend recipient (the employee) to calculate and pay their withholding taxes from their gross income. Provide your employees with the steps to do this:
Identify whether your stipend must be added to your overall income by determining the stipend classification as a pre-tax, non-taxable, or taxable benefit.
Your income tax bracket is based on your overall taxable income, which will determine the percentage of income tax you owe. Put simply: higher income tax brackets are subject to higher tax rates. The rate you pay also depends on whether you file separately, jointly, or as the head of your household.
Subtract any exemptions you may qualify for from the total income you owe tax on. These may include standard or itemized deductions, such as mortgage interest, medical expenses, or student loan interest.
Apply the applicable tax rates from your tax bracket to your taxable income (including the stipend). This will give you an estimate of the income tax owed on the stipend.
When a stipend is not subject to tax withholding by your employer, it’s wise to set aside estimated tax payments throughout the year to cover your tax liability. Some of your benefits may be classed as imputed income, meaning that you receive benefits or perks that are not part of your regular salary, but you still owe tax on them.
Example: A free gym membership or company car may be classed as imputed income, which is added to gross pay for the purpose of tax withholding calculations. However, it isn’t added to net pay as you’ll receive the value via your benefits administration platform.
Benepass provides detailed imputed income reports within our Admin Dashboard, which employers can download and upload to their payroll system so they can add it to regular paychecks and remove the burden of employees receiving a large tax bill at the end of the year. Alternatively, some companies may choose to “gross up” and pay the tax owed on the employee’s behalf.
Tip: Companies may wonder how often they should add imputed income to employee paychecks. These amounts must appear on year-end W-2 forms, and relevant payroll taxes must be accounted for by the end of the year. Employers usually report imputed income throughout the year to ensure there is enough net pay for tax withholding.
The best practice is to report it either monthly or quarterly depending on the amount of imputed income. For example, you may not want to wait until the end of the quarter to report it in case there are terminations that result in small paychecks which can’t cover taxes for large amounts of imputed income. To guide your reporting structure, look at your typical imputed income and compare it against the smallest average paycheck of those who are eligible for benefits.
Remember: Tax calculations can be complex, and individual circumstances may vary. We always recommend consulting a professional tax preparer to stay on top of your tax payments to ensure accuracy and compliance.
Stipends can establish your company as an employer of choice. But with numerous types and classifications of stipends, tax compliance can be complex and both employers and employees must understand their responsibilities in issuing and receiving stipends. This includes the annual contribution limits for each stipend category.
Need a way to make this easier? Benepass is a benefits administration software that eliminates confusion about managing stipends and defines eligible expense categories for your employees. Whether you offer pre-tax, non-taxed, or taxable stipends, Benepass ensures you comply with all applicable IRS regulations.