Are Stipends Taxable? A Complete Guide for 2024

Understanding your taxes is essential if you want to stay compliant and maximize every dollar you invest in your employee benefits package. So, are stipends taxable? If your company offers employee stipends, you should know the Internal Revenue Service (IRS) considers them taxable income in some situations. 

Our guide explains exactly how they work, by explaining:

• How the IRS categorizes different types of fringe benefits and the tax implications for each
• Where the burden lies for withholding taxes
• How to manage your stipends from a compliance-friendly platform 

How are stipends taxed?

A stipend is a benefit that employees receive in addition to their regular salary as part of their total compensation package. Employers pay them upfront or regularly (for example, monthly or annually) 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, non-taxable, and taxable benefits. 

Pre-tax 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, reducing the employee’s taxable wages overall. 

Non-taxable benefits 

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 you don’t need to report them 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:

1. The expense must have a business connection.
2. The expense must be substantiated within a reasonable period (within 60 days).
3. The employee must return any amount that exceeds the substantiated expense within a reasonable period (within 120 days).

Download our free template for an example of an accountable plan. 

Taxable benefits 

Stipends are considered taxable income by the IRS if they don’t belong in the pre-tax or non-taxable categories. Companies must list the benefits on employees’ W-2 forms and withhold state and federal taxes accordingly. 

Stipends vs. salary: how do they compare?

Stipends and salary are distinct ways of compensating your employees for their time and work. Here are the main differences and similarities between them: 

• Stipends, like salaries, are subject to Social Security and Medicare taxes unless they meet specific exceptions outlined in IRS Publication 15-B. 
• Stipends are not used instead of wages for work performed. Instead, they cover specific travel, living expenses, or education expenses. 
• Stipend amounts are usually lower than minimum wage. Employers can select the exact amount based on their budget and benefits strategy. 

Which types of stipends are taxable?

Let’s explore some common categories of stipends and whether employees will pay taxes on each.

Health and wellness

Smaller organizations may offer taxable health insurance stipends instead of providing group health coverage or a health reimbursement arrangement. However, companies with 50+ employees must offer formal health coverage instead to satisfy the criteria in the Affordable Care Act. 

For these mid to large-sized organizations, wellness stipends are attractive to employees as they offer a more generous range of benefits that may not be available as part of their medical coverage. These might include gym memberships, physical therapy, counseling, alternative treatments, health supplements, massages, and wellness products. 

Example: Reachdesk offers its employees $150 per month to spend on wellness expenses. 

Personal travel 

Travel stipends assist employees with expenses associated with personal travel so they can take a much-needed break from work, then return feeling refreshed and 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. 

Personal travel is typically classed as a nonaccountable plan, which doesn’t require formal documentation but is therefore taxable. 

Commuting costs 

Commuting stipends offset the cost of commuting for employees living some distance away from their workplace. This isn’t the same as business travel—commuting starts before and after the working day, while business travel happens as part of your work. 

Commuting costs like fuel or using a service like Uber or Lyft are considered post-tax benefits. 

Meal 

Employers can provide taxable meal stipends to cover food-related expenses like lunches, groceries, meal kits, food deliveries, or restaurant vouchers. 

Example: Wix employees receive a biweekly allowance to spend on food deliveries, groceries, dinner subscription boxes, and local restaurants. 

Housing 

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.

What stipends are not taxable? 

Employers can offer a number of tax-free stipends; confusingly, some of them fall into some of the categories mentioned above but may become tax-free depending on expense reporting, contribution limits, and other criteria: 

Cell phone and home office 

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 cell phone stipend is a tax-free benefit. 

Similarly, home office or technology stipends may be tax-free if the employee can prove they’ve charged specific business expenses to the company. 

Professional development 

Your team members might use professional development stipends 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 payroll taxes.  

Work-related travel 

The IRS requires employees to use an accountable plan, providing expense reports and documentation to receive a tax-free stipend for business travel. Employees might use theirs for attending meetings and conferences, or for travel-related roles, such as travel journalists. 

Qualified parking and transit costs 

Employees may deduct parking and commuter expenses on a pre-tax basis, up to $315 per month for transit and $315 for parking. IRS Chapter 132 outlines the specific rules related to the vehicle type and parking locations for each. 

On-site meals 

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. 

Family formation 

Taxation is complex for family forming benefits. For adoptions finalized in 2024, up to $16,810 in adoption assistance provided by an employer may be excluded from an employee’s taxable income. Otherwise, benefits covering fertility expenses would be considered taxable, unless you provide coverage for “medically necessary” fertility treatments in a tax-advantaged HRA. Surrogacy is viewed as elective and is therefore ineligible for HRA coverage. 

Employers who want to provide inclusive support for their employees who are hoping to start a family can offer a Family Care and Formation account, which offers support for fertility, adoption, or surrogacy services. 

Dependent care stipends 

Dependent care flexible spending accounts (DCFSAs) allow working parents to allocate a portion of their pre-tax salary toward childcare expenses. The IRS does not limit the amount of childcare benefits you receive, only the tax-free amount—the current cap is $5,000 per household or $2,500 if married and filing separately. Anything above the $5,000 threshold becomes a taxable childcare benefit, subject to the relevant federal tax rate. 

Example: The Community Group offers flexible stipends upfront through a Benepass Lifestyle Spending Account, using “parent support” as an eligible expense category. 

Download our guide to learn about even more types of stipends available and how to design a successful program.

How employees can calculate the tax owed for stipends

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. Here’s how: 

1. Determine the taxable amount

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. 

2. Locate your tax bracket

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. 

3. Subtract your deductions  

Subtract any exemptions 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.

4. Calculate your income tax

Apply the relevant rate 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.

5. Set aside withholding or estimated tax payments 

When a stipend is not subject to your employer withholding taxes, 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 some terminations result in small paychecks that 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 tax professional to stay on top of your tax payments to ensure accuracy and compliance. 

How to administer compliant stipends with Benepass

Need a way to simplify your stipend delivery? 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. 

Relieve the burden of managing employee stipends from a single, efficient platform by booking a free Benepass demo today, or contact sales@getbenepass.com to connect with a benefits specialist.