Young intern showing a project to her mentor on her laptop.

Stipend: Definition And Explanation

Hanna Kielar6-minute read
October 27, 2021

Landing an internship is an important step for college students. The experience they gain from working for a company while still being a student prepares them for a full-time career after graduation. An internship on their resume may also help students gain the confidence of potential employers.

Consequently, completing one or more internships increases the odds of a college student landing a job after graduation.

The challenge here is that some internships don't offer an hourly wage or salary pay. This can make an intern position financially prohibitive for many students. Students must pay for their living expenses while working, even if they’re working primarily to gain experience. That said, companies can help address this challenge by offering their interns a stipend instead of an hourly wage.

What Is A Stipend?

A stipend, unlike a salary or hourly wage, is a predetermined or fixed amount of money that companies, schools or organizations pay to people – often interns, graduate assistants, public servants or trainees – to perform a certain task. It can also be a predetermined amount of money to offset work-related expenses, like traveling to a work event if it’s something that’s not normally required of the employee.

For example, an intern might agree to perform filing, record keeping and basic accounting tasks at a financial services firm for 4 hours a day, 3 days a week during the summer months. Instead of paying a salary or hourly wage, the firm pays the intern a predetermined stipend of $3,000.

Understanding Stipend Pay

There’s a key rule that companies, schools and organizations must follow when paying out stipends. According to the U.S. Department of Labor, companies can’t pay in the form of a stipend if the work an individual does isn’t considered educational training or if the employer, nonprofit or school gains an advantage from the work performed.

In such cases, companies, schools and organizations must treat an intern or other individual as a regular employee. This means they must pay them at least minimum wage.

What Is The Purpose Of A Stipend, And How Does It Work?

Like briefly mentioned above, an organization pays out a stipend to provide you with some financial support. You can agree on how you want to be compensated while completing tasks for the organization. The intern can use that stipend for a specific purpose, whether that’s to pay for rent, meals, transportation or something else.

Colleges might pay stipends to graduate assistants. For example, instead of receiving an hourly wage of $13 an hour, a graduate assistant might instead receive a stipend of $2,000 to cover the cost of work they do during a semester. The college might provide the stipend to help graduate assistants pay for meals or transportation to and from campus buildings.

A stipend might seem attractive to a college student, especially those who want to start saving money each month but don’t have a steady enough income to do so. But Stacy Caprio, a financial blogger with Fiscal Nerd, says that receiving a salary or hourly wage is always a better option for workers.

"It makes sense to accept a stipend only if you have no salary offers from the same company or another company and need to take a job," says Caprio. "Having a salary and being on official payroll is always the better option for taxes and benefits."

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What Should You Consider Before Accepting A Position With A Stipend?

Igor Mitic, a financial advisor for the Fortunly financial blog, said that individuals need to consider their motivations for taking a position that pays in a stipend. Such positions might make sense for individuals who want to learn a new skill or gain experience that they can use to land a salaried position.

There are drawbacks, though. Individuals will usually make less money with a stipend than they would if they received a salary and a stipend won't grow. This means you won't get a raise or earn more money because the amount you’re getting paid has already been set. That’s why if you’re trying to save for a particular goal, such as moving into your own apartment, a salaried position is usually a better choice than a stipend position.

“Taking a stipend makes sense if you’re an intern whose main goal is to gain new knowledge and some experience in the business world,” Mitic said. “Would you be productive and motivated knowing that you cannot get a raise no matter how much you work?”

How Often Are Stipends Paid And What Is The Amount?

How often a stipend is paid is determined by the organization. Most companies have their employer pay out stipends for their workers weekly, biweekly, monthly or even annually. Some stipends might be for one day’s worth of tasks, while others might be for the whole year’s worth of tasks.

The payment price for a stipend is usually low but varies depending on the company and the expenses incurred related to a person’s responsibilities on the job. In most circumstances, an organization will determine the amount based on the cost of living in the area.

What Are The Types Of Stipends?

Stipends aren’t just for interns. There are many different types of stipends offered by employers and organizations.

Academic Research

Academic institutions may offer stipends to cover researchers and help advance their studies or support their work without worrying where their funding will come from. There may be more specific criteria, such as providing proof of where the money will go or explaining the purpose of the project.

Specific Expenses

Some employers may ask you to do certain tasks that are out of your normal job description. For example, your boss asks you to represent the company by speaking at a national conference. In this case, your employer will pay for expenses related to this event such as travel, food and conference tickets.

Health Insurance

Your employer may offer a health insurance stipend in addition to your paycheck to help you with your insurance costs.

Wellness Programs

An example of a wellness program could be a free gym membership or a financial planning class.

Job Training

Employees who take additional classes for professional and career development training may have their employer pay for it, if it’s to assist them with their career or job.

Internships

Depending on your internship, you may get a stipend to pay for food and housing. How much you get may differ since the average cost of living varies from area to area. The organization might also offer you a stipend specifically to purchase new equipment like a laptop to do your duties.

What Can You Use A Stipend For?

A stipend can be used for almost any purpose as long as it’s to assist with your living or work-related expenses. In some cases, the stipend is paid upfront and used to buy materials, so you won’t see the money itself. Let’s say you’re eligible to receive a stipend for your research project. The organization can then pay for your books and they’ll be delivered to you without you receiving a bill.

Are Stipends Taxable?

In most cases, stipends are taxable and getting a stipend will cost you at tax time. That’s because the IRS considers stipends to be taxable income. This means you’ll have to pay federal and possibly state income taxes on them. However, since a stipend doesn’t count as wages, you don’t need to pay Medicare or Social Security taxes.

There is some leeway, though. Any part of a stipend that’s used for educational expenses isn’t taxable. Say you get a stipend of $4,000 to serve as a teaching assistant at your college. If $2,000 of that stipend is used for tuition and school supplies, you’ll only have to pay taxes on the remaining $2,000.

Who Qualifies For A Stipend?

A stipend is for those who meet a certain number of criteria as defined by the U.S. Department of Labor. Generally, you can legally qualify for a stipend if you’re undergoing training (like an internship or for an education related project), you’re not receiving any wages and there isn’t a promise or guarantee of a job once your training is done.

What Is The Difference Between A Stipend And A Salary?

The biggest difference between a stipend and salary is that a stipend can be lower. When companies or organizations pay a stipend, they don’t have to pay minimum wage.

Another big difference? Stipends aren’t considered wages, though it can be considered an addition to a salary. The money from a stipend is used to cover expenses that individuals face when performing a specific job for a company or organization during a set period, such as for an unpaid internship, but it is not recognized as compensation for their work like a salary.

Stipends are also sometimes used to reward employees for taking on extra work. For instance, a public high school’s math teacher might receive a stipend for coaching the football team, and the music teacher might receive a stipend for directing the school play.

The Bottom Line

A stipend program is a fixed sum an employer pays individuals to motivate and allow them to gain industry knowledge, training and experience. Stipends are beneficial for both the employer and employees because companies do not have to pay a wage, and it helps these professionals finance their expenses.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.