A stipend and a salary are both forms of compensation, but they work in different ways. While salaries are paid to employees for their work and time, stipends are paid to cover living expenses or other costs. Stipends are becoming a more common part of compensation packages, especially in competitive industries.
Both stipends and salaries have tax implications for both the employer and employee, and it’s important to understand the differences between the two when you’re evaluating a job offer.
This article will cover the differences between a stipend vs salary, including their purposes, tax implications, and suitability for different situations, so you can know what to expect.
What is a salary? The foundation of compensation
Most of us are familiar with the concept of a salary: It’s a set amount of money your employer pays you on a regular schedule—usually every year or every month—in exchange for the work you do. Your salary is generally spelled out in your employment contract.
Salaries are paid regardless of how many hours you put in or how many widgets you produce. Unlike hourly wages or commissions, a salary is a dependable source of income.
Here’s what else you need to know about salaries:
- Salaries are typically expressed as an annual amount, but they’re paid in installments every week, every two weeks, or every month. For example, if your annual salary is $72,000, you’ll get $2,769.23 every two weeks before taxes and deductions.
- Salaries are subject to standard tax withholding for federal, state, and local income taxes, along with Social Security and Medicare taxes.
- Salaried employees must meet minimum wage requirements and must comply with the Fair Labor Standards Act (FLSA), particularly for exempt employees. According to the FLSA, exempt employees must earn at least $844 per week.
Defining Stipends: Compensation for Specific Purposes
A stipend is a set amount of money you receive to cover expenses related to work, education, or training. You might receive a stipend if you’re an intern, a fellow, or a graduate student, for example. Stipends are generally awarded to people who aren’t considered employees.
The idea behind a stipend is that it will offset costs like housing, food, travel, or continuing education. The person receiving the stipend is mainly focused on learning and training, so the stipend is mainly for their benefit.
How Stipends Work
Stipends can be paid as a single payment or in installments over time.
Taxes on stipends can be tricky. Depending on why you’re receiving the stipend and how it’s structured, it may be considered taxable income, or it may be considered a nontaxable reimbursement.
If you receive a stipend, it’s your responsibility to understand your tax obligations and manage them accordingly. Consult with a tax pro to make sure you’re reporting your income accurately.
Key Differences Between Stipends and Salaries
While both stipends and salaries provide financial compensation, there are key distinctions in their purpose, tax implications, and the nature of the relationship between the provider and recipient.
Purpose and Intended Use
Salaries are general compensation for work. You can use the money for whatever you want. Stipends, on the other hand, are usually earmarked for specific expenses, like housing, travel, professional development, or wellness. Your employer may require you to use the money in a certain way.
Tax Implications
Salaries are subject to standard tax withholding. Your employer takes out money for income taxes, Social Security, and Medicare. Stipends may or may not be subject to tax withholding, depending on what the stipend is for and what the IRS says. Some stipends are considered taxable income, so you’re responsible for managing your own tax obligations. However, stipends specifically for living expenses aren’t typically considered wages by the IRS, so they’re not subject to withholding.
Employment Relationship
Salaries are almost always paid to employees as part of an employer-employee relationship. Stipends are often given to people who aren’t considered employees, like students, interns, or fellows. That said, stipends can also be offered to employees as part of a comprehensive benefits package.
Legal and Regulatory Considerations
Salaries must comply with minimum wage laws and other labor regulations. Stipends aren’t always subject to the same legal requirements, but employers still have to follow all applicable tax laws and regulations.
Types of Stipends and Their Applications
Stipends come in many shapes and sizes, designed to meet a wide range of needs. Here’s a look at some of the most common types of stipends and how they’re used:
Academic and Research Stipends
- Graduate Stipends: These stipends help graduate students cover their living expenses while they’re working on their advanced degrees.
- Research Stipends: Researchers and scholars may receive stipends to support their research.
Internship and Training Stipends
- Internship Stipends: Interns, especially those in fields where unpaid internships are the norm, may receive stipends to help with expenses. For example, interns who work for members of Congress sometimes receive stipends.
- Apprenticeship Stipends: Similar to internship stipends, these help cover expenses for people in apprenticeship programs.
Wellness and Lifestyle Stipends
- Wellness Stipends: Some companies offer stipends to promote employee well-being. These can be used for fitness, mental health, or other healthy living expenses. For instance, Salesforce has a monthly wellness stipend, and Adobe provides one annually.
- Lifestyle Spending Accounts (LSAs): These accounts let employees use stipend money for a variety of personal interests and hobbies.
Expense-Related Stipends
- Transportation Stipends: These stipends cover commuting costs, like public transportation or parking.
- Home Office Stipends: Employees may receive stipends to help them set up and maintain a productive home office.
- Cell Phone Stipends: Companies might reimburse employees for using their personal cell phones for work.
Professional Development and Education Stipends
- Continuing Education Stipends: These stipends support employees who want to pursue further education or professional certifications. Balsamiq, for example, offers this type of stipend.
- Professional Development Stipends: These cover the costs of attending conferences, workshops, or training programs.
Family-Related Stipends
- Childcare Assistance Stipends: These help employees with the often-significant costs of childcare.
- Family Planning Stipends: Some companies offer stipends for family planning expenses, such as fertility treatments or adoption assistance. Spotify, Google, and LinkedIn offer stipends for egg freezing and other fertility treatments, while Adobe helps with adoption and surrogacy costs.
Stipends as a strategic tool for employers
Savvy employers can use stipends to attract great workers, keep them happy, and boost their own bottom line in the process. Here are a few ways stipends can be a win-win for companies and employees.
Attracting and retaining talent
Let’s face it: A job that comes with a stipend looks more attractive than one without. Stipends demonstrate that a company cares about its employees’ well-being and professional growth, which can boost retention rates.
Promoting employee well-being and engagement
Wellness stipends and lifestyle spending accounts can improve how workers feel about their jobs and their employer. Stipends can show that a company values a positive culture and a healthy work-life balance.
Cost-effectiveness and flexibility
Stipends can be an affordable alternative to traditional benefits, and they allow employers to customize compensation based on what employees want and need. Stipends are flexible in design, so companies can change their programs as business conditions change.
Tax advantages
Stipends that are set up correctly can provide tax benefits for both the company and the employee. It’s essential to talk with a tax professional to make sure you’re following IRS rules and getting the most bang for your buck.
Frequently Asked Questions
Do stipends count as income?
Yes, stipends are generally considered taxable income by the IRS. Even though they might not be labeled as “wages,” stipends represent compensation for services or support, and are therefore subject to federal and potentially state income taxes. It’s important to keep accurate records and report your stipend income when filing your taxes.
What does it mean to be paid in stipend?
Being paid in stipend typically means you’re receiving a fixed sum of money periodically (monthly, quarterly, etc.) to cover living expenses or other costs associated with a specific activity, like research, training, or an internship. The stipend isn’t necessarily tied to a specific hourly rate or a traditional employer-employee relationship, but rather aims to support your participation in the activity.
What is the difference between stipend and allowance?
While both stipends and allowances provide financial support, they differ in their purpose and context. An allowance is usually a fixed sum given regularly (e.g., weekly allowance for kids) for general spending, with minimal oversight. A stipend, on the other hand, is generally intended to cover specific expenses related to a particular activity or commitment, and may come with certain conditions or reporting requirements. Stipends also tend to be larger and more formal than allowances.
The Bottom Line
Stipends and salaries are both ways to compensate people for their work and contributions, but they differ in several key ways. Salaries are a predictable income that covers all expenses, while stipends are intended to cover specific costs, like housing or transportation.
Whether you’re an employer or an employee, it’s important to understand the tax implications and legal considerations of each type of compensation. Both stipends and salaries have tax implications for those who receive them, and employers need to follow all applicable labor laws.
Employers can strategically use stipends to sweeten the deal for prospective employees, attract top talent, and boost the well-being of their current workforce. By offering stipends for things like professional development, health and wellness, or childcare, employers can create a competitive benefits package that supports employees’ overall well-being and professional growth.