What is a Stipend?

A stipend is like an allowance…

If your household is like many others around the world, you might give your kids an allowance. Every week, you might give them a $5 bill to help them gain an understanding of managing money. That money is not a payment for cleaning up after themselves. It doesn’t change each week depending on how many chores they do. It’s just a set amount of money that you provide.

A stipend is usually a small amount that offsets some cost of giving up your time but isn’t tied to your productivity.

For example, it might offset the cost of getting to the volunteer site. If a company pays a volunteer too much, or in a way that resembles an employee’s salary, that volunteer might be considered an employee. Each set of circumstances is unique, but being paid a stipend without a salary usually means that you are not considered an employee.

Getting paid a stipend usually happens with a small check every month. But you can get this money without being an employee or a contractor for whoever is providing the cash.

The difference between an employee and a volunteer or contractor can have meaningful consequences. If a person is considered to be an employee by the department of labor, the requirements of the Fair Labor Standards Act (FLSA) may apply.

In that case, the minimum wage, overtime, and recordkeeping requirement of the FLSA would kick in. The employer would become responsible for tax collection and the payment of the employer portion of certain taxes.

Employees may also receive stipends in addition to their wages. These payments are for work expenses and are not determined based on hours worked. In most cases, these additional payments are called allowances.

Most of the time, a stipend is meant to offset some of the costs of working for free. A volunteer might get a stipend to cover the cost of gas needed to reach a worksite. Or a volunteer firefighter might get a small payment to help offset lost wages while they go to a week-long training event.

Many people are willing to give up some of their time to support a cause. But sacrificing their time in addition to paying for travel, food, lodging, and materials might test the limits of what a volunteer can afford. A stipend can help offset some of those extra costs, without it being considered payment for their labor.

In other cases, a stipend can make it possible for someone to participate in a program. For example, there may be cases in which a person could not afford to go to school, even if the tuition was free. The cost of books and supplies could be financially prohibitive. In this case, financial assistance could include a stipend to help cover the cost of those items.

If you are eligible to receive a stipend, you will probably receive a check or deposit on a set schedule. You might get a one-time payment at the beginning of the program, or you may get a smaller amount every week or month. Let’s say you get accepted into a six-month program exploring an archaeological site in a foreign country. The expedition might pay for your travel, provide your food, and offer you shelter.

Perhaps the program also gives you a $3,000 stipend to partially offset the opportunity cost of being away from home. In this case, the program manager might write you one check for $3,000 or a monthly check of $500.

However, the stipend will probably not include any tax withholdings. Your family probably won’t qualify for health insurance coverage or a dental plan. And you are not likely to see any contributions to a 401(k) (retirement plan). Plus, you won’t get any overtime pay or even a minimum wage. If you accept the entrance into the program, you do so for the experience — And not for financial compensation.

Stipends are typically paid to interns, apprentices, assistants, volunteers, and trainees. These stipends can go by several different names for many different functions.

Many universities offer stipends to graduate students when they work as research assistants. The payment is usually meant to offset living expenses so that the graduate assistant does not need to find other work or seek another financing source. By providing the stipend, the assistant can focus their efforts on the research at hand.

Students that receive financial support to attend an academic institution may receive a fixed sum of money to help cover the cost of books, housing, or even food. For example, the GI Bill for military veterans includes a $1,000 per year stipend for books and supplies in addition to paying tuition and fees. In other cases, a university might offer a stipend to teaching assistants.

Many businesses, nonprofits, and government agencies offer internships to college students or recent graduates. Through the internship, the intern gets the work experience they need to get a job offer. Some internships pay a lower wage to interns as compensation for their work. Others are unpaid internships, which may offer a small stipend.

In some situations, a nonprofit organization or government agency may provide training for specific individuals. The gained skills could make the trainee more valuable in the workforce. However, they may not be able to afford to take the time away from other wage-earning opportunities to do the training.

A stipend can sometimes help offset those lost wages enough to encourage someone to participate — Though, employers typically allow employees to receive pay while in training rather than pay them a stipend.

A business or nonprofit organization might provide health insurance, or a stipend to assist with medical costs, to volunteers or employees.

Some employees may receive compensation to offset employment expenses in addition to their regular salary. Some examples include a clothing allowance for a job that requires a specific wardrobe, or a per diem to help cover the cost of meals while traveling for work.

A stipend and a salary are similar in that both are fixed payments. Neither a salary or a stipend changes based on performance or the number of hours worked. However, a salary is compensation for labor, while a stipend helps offset costs. When an employee accepts a salary, they typically sign an employment contract that defines how much their salary will be. Then, their pay doesn’t usually change, regardless if they work 35 hours one week and 65 hours the next.

A stipend is also fixed, but it doesn’t reflect the going rate for the person’s time. Instead, a stipend helps cover expenses tied to doing the duties requested by the provider. It could be a $1,000 per year stipend for textbooks, or a $500 per month stipend for living expenses. So long as the money isn’t compensation for work, it’s probably not a salary.

Students who are awarded scholarships or fellowships often receive the money as a stipend. The money is a direct payment to the student, rather than paying the school for tuition and fees on their behalf.

In other cases, a program might offer a stipend in addition to other forms of financial aid. For example, the GI Bill (support for military veterans) offers a $1,000 stipend for books and supplies on top of paying for classes. Stipends may be distributed all at once, or in monthly installments.

The Internal Revenue Service (IRS) collects taxes on all income, not just wages and salary. So, yes — A stipend payment is almost always taxable income. However, employers are only responsible for withholding taxes from employee pay.

In most cases, you will receive a check for the whole stipend amount. Then, when it’s time to file your Form 1040 in April, you will have to add the stipend to your income without adding any withholdings. Unless you had excess withholdings from another income source, you would probably still owe taxes on your stipend.

The exception to this rule is that the portion of scholarships and grants used to pay for your education are usually tax-free. But funds that exceed your educational costs might be considered taxable. The rules on what is taxable can get tricky. If you have any questions, you can consult a tax professional or financial advisor.