My next door neighbor's son is starting his Ph.D at a local university. His school sent him an email telling him that he would not be receiving a W-2 or a 1099 for his stipend. His first paycheck had city and state taxes withheld but no Federal. Questions:
I know the stipend is taxable, but is it subject to self employment tax.
If it's taxable, why doesn't the university withhold.
How can they get away with not issuing a tax reporting statement? How many of these students are going to know they need to report it?
A PhD student stipend is about $20,000 a year. It is in addition to the tuition, so it will all be taxable. The tuition and scholarship will be reported on the 1098T. The stipend will not be reported at all, according to the school.
So why isn't the school reporting it? And why withhold only city and state?
There is no federal requirement to withhold income taxes on a stipend paid to a Phd candidate. I believe the reason is that the payment could be used for tax-free benefits (tuition, fees, course related supplies, etc.) and Congress opted not to require withholding. The income is taxable and the candidate is on his own to ensure he meets the estimated tax requirements and/or declares the income and pays taxes. Unless the candidate is required to perform services for the university to obtain the stipend, it is not compensation. It is taxable scholarship income reported on Line 7 of the 1040/1040A. If the candidate is required to perform services for the university, then some part representing compensation has to be reported by the university using the 1099-MISC rules. This amount is self-employment income. Under certain circumstances, the candidate may be treated as an employee and get a W-2.
It is quite possible that the state requires tax withholding on such payments.
I should have added, for completeness, that my answer related to candidates who were US citizens, US resident aliens or nonresident aliens from a country with a tax treaty with the US exempting such income. Any other international student would have taxes withheld from the taxable stipend.
Alan: That is very helpful. Thanks. Your explanation for why they don't withhold makes sense. But I still don't understand how they can not report it on a 1099. I suspect quite a few of these students are just not going to report it.
A little further digging and I found Notice 87-31 (still valid) that very explicitly says payments that are considered scholarships or fellowships do not require reporting.
Quoting:
In General
The Internal Revenue Service intends to promulgate regulations that will provide that unless a scholarship or fellowship grant is subject to the provisions of section 117(c) of the Code, neither the grantor nor the educational organization attended by the recipient (in the case where the educational organization is not the grantor) is required under section 6041 to file a return of information with respect to such grant.
In addition, unless section 117(c) of the Code applies, the amount of a scholarship or fellowship grant is not considered wages. Thus, such amount is not subject to section 3402 (relating to withholding for income taxes), section 3102 (relating to withholding under the Federal Insurance Contribution Act (FICA)), or section 3301 (relating to the Federal Unemployment Tax Act (FUTA)).
End Quoting
The reference to Section 177(c) is to the paragraph that says: ".. any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction." is taxable.
In addition, such amount is considered to be wages and it gets reported on a W-2. So.. forget about my comment regarding a
1099-misc. The candidate would get a W-2.
Therefore, I must conclude that any school that is paying a stipend and not reporting considers it to be a scholarship or fellowship grant. It is left to the candidate to make the determination as to how much is taxable. I.e., not used for qualified higher education expenses.
It's been like this for a long time. I recall when I was a grad student about 1980 encountering the same issue, no 1099 but I was supposed to report it anyway.
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