Stipends are becoming a creative and attractive way for small business owners to compensate and reward their employees.
In today’s article, I’ll explain what stipends are, how to set them up, and how they can affect your taxes.
What is a stipend?
In the business world, a stipend is a set amount of money that can be used to compensate employees, interns, apprentices or trainees. Typically, a stipend is used to help an employee offset certain expenses like travel expenses or training-related expenses. They can also be considered fringe benefits to help reward and attract employees.
Stipends are not used in place of a salary or wages and should not be used to compensate an employee for work performed. Stipends can be set up to be distributed on a regular basis and can be added as an additional line on an employee’s paycheck. Since stipends do not need to meet minimum wage requirements and are distributed at the employer’s discretion, there aren’t rules about required stipend amounts or how often they can be dispersed.
How are stipends taxed?
Stipends are generally considered taxable income, but typically employers don’t withhold taxes from stipends. This means that the recipient will pay income, Social Security, and Medicare taxes on the money when they file their income taxes. If you’re receiving quite a bit of your income through stipends, then you’ll want to set aside around 15-25% of your stipend earnings to help pay these taxes.
However, some stipends are not taxed. For example, if you receive stipends to help pay for what the IRS calls a “qualified parking fringe benefit,” then your stipend will only be taxed if it’s above a certain amount set by the government. Additionally, infrequent de minimis benefits are not considered taxable income, so stipends used for that purpose would be excluded from income taxes as well.
If you’re not sure whether or not you need to pay income taxes for a stipend you’ve received, consult an accountant for help.
What can be paid with stipends?
Employers can use stipends to compensate workers for a wide variety of expenses, such as:
- Cell phone plans
- Fitness expenses like gym memberships and personal trainers
- Health insurance premiums
- Health-related expenses
- Home office costs
- Internet access
- Mental health expenses
- Pet care
- Professional development
- Training classes for job-related or wellness-related trainings
- Travel for work
In addition to these typical stipends offered by employers, other sectors may offer stipends for:
- Academic research
How can I set up a stipend?
As an employer, there are several ways that you can set up a stipend. No matter which way you choose, it’s always a good idea to have a written policy in place that outlines who, how much, and how often stipends will be issued. You’ll want to clearly communicate that plan to your employees, interns, apprentices, and trainees so they can know what to expect. Of course, you’ll also want to keep accurate financial records of any stipends paid.
The three most common options for setting up a stipend are:
Lifestyle Spending Account
If you like the idea of allowing your workers to use their stipend money in a flexible way to pay for lifestyle and wellness-related expenses, then you might consider creating a Lifestyle Spending Account (LSA) through a financial institution. The institution will create the account and often provide software to help you and your employee categorize and track spending. An LSA can be used to pay for a variety of expenses, and you’ll be able to set those parameters up front.
If you’d like to go a more traditional route, you can add stipend payments to your regular payroll as a separate line on the paycheck. You’ll just want to categorize it as a stipend and check with your accountant or IRS regulations to make sure you’re withholding the appropriate amount for employment taxes.
Of course, if you’re thinking of offering a one-time stipend, you can always issue a separate payment to the individual you’re compensating.
Overall, stipends don’t have to be complicated, and they can allow small business owners flexibility when compensating their employees. Business owners who are looking for creative ways to reward employees and to attract new talent to their team should work with an accountant to determine the best way to set up and distribute stipends.