How do you pay a stipend? In what ways will affect our taxes or the person receiving it? We will go over this and more so you will have a clear understanding of how stipends work.
How Stipends Work
Stipends are typically fixed amounts given to cover financial expenses. They are often paid before the expenses are incurred. Stipends are common among students or interns who are in training and do not receive a salary. They can also be given to employees. Minimum wage requirements do not have to be met so they offer a flexible alternative to traditional employer-employee compensation.
Employee perks differ from stipends in that perks are often non-monetary benefits. An employee works for their salary but he or she may still receive a perk, such as discounted merchandise, movie tickets or gym memberships regardless of their usual wages.
How to Pay Stipends
An employer can offer an amount on a monthly stipend for certain expenses incurred. The individual can then submit receipts or documentation of the costs incurred and the employer can then reimburse them.
The drawback to the reimbursement method is that it could be more of a hassle of tracking individual purchases.
Another option is to provide a one-time stipend. This helps to reduce the administrative burden of having to write a check or make payment several times for the same individual. It also allows for the budgeting of the stipend well in advance.
The drawback of making a lump sum payment is that the stipend is not tied to actual costs as it would be when you reimburse the recipient.
Types of Stipends
There are many different types of stipends that a business owner can offer his or her employees. Most are tied directly to the type of expense or benefit that the stipend provides. Others promote wellness programs and other benefits programs.
A health stipend may provide payment to employees whose expenses are not covered by the company’s health insurance policy. Wellness related expenses such as a gym membership or a smoking cessation program may be out of pocket expenses that can be subsidized through a stipend payment.
An allowance can help pay the cost for airfare, car rental, taxis and other related costs.
Remote Work Stipends
In today’s world offering your employees some work-from-home option is a valued benefit. A stipend for remote workers can include payment for phone and internet costs, webcam or software that enables them to work productively in a virtual environment.
An educated and skilled workforce can be a real asset. This can only be done by having employees who are committed to professional development. A learning stipend could be the incentive for employees take additional training, certification programs or other career development.
Communicate the Benefit to Employees
If you decide to implement stipends as a benefit in your business then you should let your employees know during the hiring process. This will help them to properly evaluate the offer and how it compares to other employers.
Small business owners who do not offer retirement plans should be aware that the IRS treats stipends as compensation. As such the person who receives the stipend can fund an Individual Retirement Account (IRA) even if they have no other income.
How Are Stipends Taxed
A stipend received is taxable income. However, stipends differ in that unlike regular wages an employer does not withhold federal taxes or for Social Security and Medicare taxes. Someone receiving a stipend should be aware of this. If not there could an unexpected amount due when it is time to file their income tax return.
If paid through payroll the stipend payment may show on a separate line of the recipient’s paycheck.
For tax reporting purposes the stipend may appear either on Form W-2 or Form 1099-MISC.
Benefits of Stipends
Business owners may find stipends to be a convenient way of attracting employees. In a competitive labor environment stipends could be just one part of the entire benefits package and could be a contributing factor when deciding where they want to work.
Budgeting is another plus. Every small business should be operating with a budget in mind. It’s just good practice. If you set aside a fixed amount as a stipend you are, in effect, keeping a cap on your expenses.
Most small business owners are short on time. A monthly stipend can also save a lot of time by not having to track individual expenses.
How A Business Should Use Stipends
A business owner should offer stipends strategically. Determine the pain points in your organization. Is your office in a location where parking is difficult? Perhaps you can provide employees a commuter stipend for parking or commuting expenses.
Is health and wellness important to your staff? A stipend for a health club membership could encourage employees to exercise more. Lifestyle benefits could result in them being more energized to help your business.
You may have a team with varied interests. A separate payment for each employee could provide personalized perks that makes their employee experience that much more engaging and enjoyable.
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