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What Is a Stipend and How Does It Work?

Internship or apprenticeship is an important stepping stone for every student, whether in academia or just graduating from college. These are opportunities to take one's learning and hands-on experience in the field of their specialization a level above.  

Completing an internship or apprenticeship is often mandatory to get through the final stages of the course. However, landing these opportunities is not easy. And even more difficult is to get paid for them.

Firms and companies do not pay an hourly wage or a fixed salary for internship positions. Therefore, it can become financially burdensome for an intern to cover the cost of lodging, commuting, and other necessary expenses. This is where a stipend comes in.

Here's what this article will cover:

  1. What is a stipend?
  2. How do stipends work?
  3. Eligibility criteria for receiving a stipend
  4. Who qualifies to get a stipend?
  5. Rules for paying stipends
  6. Tax withholding
  7. Tax return reporting
  8. Negotiations basis
  9. Stipend vs. Salary
  10. Types of stipends
  11. Are stipends taxable?

What is a stipend?

A stipend is a small yet fixed amount of money paid by firms, companies, and offices to temporary employees such as interns, trainees, and apprentices. The purpose of a stipend is not entirely to compensate the employee for their time and labor, but rather to offset basic expenses of living.

Since a stipend is not an hourly or performance-driven compensation, it does not replace wage or salary. Therefore, the amount of money paid as a stipend can be considerably low. An average stipend is determined by the local cost of housing, travel, and food.

The period of payment can vary from one place to another. It can be a weekly payout if the firm decides so. It can also be a monthly amount if the employee is hired for around six months, or it can be a lump sum amount if the working period is only 1-2 months.

For example, if a junior medical intern assists a senior doctor at the clinic, the intern is likely to be paid on a per month basis. On the other hand, if a college intern joins an accounting firm to do basic filing and data entry for two months during the summer break, he or she is likely to get paid a lump sum amount at the end of the internship.

How do stipends work?

To understand how stipends work, you have to first get a grasp on what is the definition of a stipend.

The Cambridge English Dictionary defines 'stipend' as "an amount of money that is paid regularly to someone, especially for work or training that is usually unpaid".

A stipend, at its core, is essentially that. However, there are several ways that it can be agreed upon between the employer and the employee. The company or the firm that regularly hires interns can have a certain amount written into their policy for a particular period of internship.

Alternatively, the company and the intern can discuss and settle on an amount for the time period of work.

Eligibility criteria for receiving a stipend

One needs to fit certain criteria to be eligible to receive stipends. As already discussed, it is not an alternative for a full-time or even a part-time wage or salary. Therefore, you will be legally eligible to receive stipends only if you are:

  • You are working at a place while undergoing education or training elsewhere.
  • You are not working as a salaried employee elsewhere.
  • There is an agreement between you and the employer that there is no definitive promise for a job once the internship is over.
  • You work there on a temporary basis and agree to a fixed payment in lieu of your work.

Who qualifies to get a stipend?

As already explained, only certain types of work will get you a stipend. If you are working anywhere in the following capacities, you are eligible to receive a stipend.

  • Intern
  • Researcher
  • Assistant
  • Apprentice
  • Clergy
  • Trainee
  • Junior Associate

This is not to say that these positions cannot earn you a full-time or part-time wage or salary. It all depends on the agreement you have agreed to sign on. In most cases, these positions are either unpaid or compensated with a stipend.

Rules for paying stipends

To further understand what is a stipend, here are some elements of the concept that you need to have a grasp on.  

  • Stipend uses

The main use of a stipend is to help trainees or interns cover the expenses of living, such as housing, commute, and more. However, that is not why all the stipend is paid for. In the academic sector, a stipend is paid to fund one's expenses for research.

A stipend can depend on the type of work one needs to do, therefore the use of it is flexible. In the case of a technical trainee, stipends can be used to cover the cost of laptop upkeep and maintenance.

While in the case of a software engineer, a stipend will cover the cost of daily travels, data charges among other things.

  • Minimum wage

In the case of wages or salaries, there is a minimum amount that you can claim as per law. However, stipends do not fall under the minimum wage category. How much stipend is paid to the trainees or interns is totally dependent on the employers.

You can, of course, negotiate for more, but there is no such law in place to ensure you receive a minimum amount. In fact, the stipend you receive might even be lesser than the minimum wage.

Tax withholding

A stipend is definitely taxable. However, since it is not a wage, your employer will not withhold social security or Medicare taxes. Having said this, you have to segregate the amount every month to pay the tax at the end of the Financial Year.

Tax return reporting

It is essential that your stipend is recorded on your annual tax return. It might be under different terms depending on the type of work you receive it for, such as "taxable scholarship", "taxable grant scholarship, "non-qualified fellowship", etc. If you are not too aware of tax-related details, get in touch with a professional who will explain to you, and also manage your returns.

Negotiations basis

Although a stipend is determined by the employer and there is no such law for you to demand a minimal payout, you can still negotiate for an increment. Here are a few situations in which you can ask for a higher stipend:  

  • You can show receipts of your rent, daily commute, and other essential expenses and make an argument that your stipend is not covering your cost of living.
  • If you have a better offer from somewhere else as a trainee or apprentice where the employer has agreed to pay a higher stipend, you can use that to your benefit. However, you will need to prove that you are an intern worth paying more for before that.
  • If the employer still does not agree on an increment, you can try and ask for coverage of expenses such as health insurance or tuition credit.

Stipend vs. salary

Here are the key differences between salary and stipend.

  • A salary is compensation for a full-time or part-time employee in exchange for their service and is calculated on the basis of their job description. A stipend is a fixed amount paid to interns, apprentices, trainees, and clergies to help cover their day-to-day expenses.
  • Salary is paid on the basis of hours worked or performance delivered. With stipend, you have no such promise. It is fixed and can only increase if the employer deems you worthy of an increment.
  • Salary is mostly paid out on a weekly or bi-weekly basis. Stipends can be weekly, monthly, or even a lump sum amount for the period of work.
  • A salary is subject to minimum wage laws. It cannot be less than the amount determined to be the minimum hourly wage by law. A stipend has no such restrictions. It can be any amount the employer thinks right.
  • Salary is taxed by employers and you are to pay Medicare and social security taxes. Stipends are taxable, but you do not have to pay Medicare or social security. Therefore your employer will not withhold your tax, so you will have to pay it yourself or get a professional to do it for you at the end of the Financial Year.

Types of stipends

Although we are constantly using the terms' intern' and 'internship,' stipends are not just for college or university students. Moreover, stipends are not just paid on the basis of the work you do. It can be compensation for any extra work you do at your full-time workplace or a reimbursement for a mandatory cost you have to bear as well.

Several factors weigh in to determine what kind of stipend you will be earning.

  • Academic research

This is one of the most common types of stipends that you can receive. People involved in academia often receive a fixed amount from the institution to fund their research work.

  • Task-specific expenses

Stipends can be paid to compensate you for certain specific tasks your employer asks you to do that does not fall under your regular job description. For example, consider you are delegated to represent your firm at a conference or escort a top-level client for a big project. In that case, you are likely to be in line for a stipend reimbursing for all the expenses plus your own compensation for the task.

  • Wellness and training programs

Stipends can be in the form of free entry to training courses or wellness center memberships. However, chances are, these need to be aligned with your line of work. For example, a gym trainer might get free of cost membership at his or her workplace to help keep themselves in shape for their job. Alternatively, an IT sector employee can get reimbursed for any training they do to learn the industry's latest technologies.

  • Health insurance

Many workplaces have health insurance of their own. However, if you hold individual health insurance, you can be eligible to get the premium cost covered by your employer in the form of a health insurance stipend. You should especially seek this out if your job entails high-risk exposure, such as working in warehouses, factories, or construction sites.

  • Fellowships

Fellowships are financial aids given to students to help support their education. It is meant to cover the cost of tuition fees in the form of stipends. In most cases, the student does not have to provide a service to receive this type of stipend and only need to continue their education.

  • Clergy

Similar to being a student, a clergy only needs to continue practicing their ministries to receive a stipend of this kind. This is mostly funded by congregation donations to help the clergy fund their cost of living without having to work.  

Are stipends taxable?

Stipends are usually taxable under the law in most states. According to the IRS, stipends are taxable income, and you will have to pay both federal and state taxes on them at the end of every Financial Year.

However, there are a few loopholes. First of all, since stipends are not considered to be wages, you need not bear Social Security or Medicare taxes. Secondly, if you can show that your stipend is being used for educational purposes, it will not fall under taxable income.

For example, if a trainee teacher earns $5000 teaching occasional classes at his or her place of education, and a part of that goes for their own tuition, residential, and examination fees, then that amount of the stipend will not be taxable. You will, however, still need to pay taxes on the remaining amount.

We hope this article gave you a fair idea of what stipends are and what they encompass. Meanwhile, you can check out our career advice page to get insights on several other interesting topics. Happy reading :)

Last updated on: 
October 27, 2023

Dipen Dadhaniya

Engineering Manager at Interview Kickstart

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