Grad Student Tax Lie #2: You received a 1099-MISC; you are self-employed.

Short answer: No, graduate student stipends are not self-employment income!

Long answer: This lie has an understandable origin. The most common use of the 1099-MISC form is a business letting a contractor know how much he received in income from them that year. However, that self-employment income will appear in Box 7.

A lesser-known use of the 1099-MISC is in Box 3, Other income. This box would include strange sources of unearned income such as gambling winnings and prizes, payments for participating in medical research studies, punitive damages… and grad student fellowships. Having 1099-MISC Box 3 income does not mean that you are self-employed the way that Box 7 income would. However, it does clearly indicate that you are not an employee of your university. Fellowship recipients are neither employees nor self-employed with respect to that income; they are students or trainees.

taxlies_2

There actually is no completely proper way for universities to report fellowship and excess scholarship income to the IRS, and they are not required to do so. There are four routes that universities take for reporting fellowship income. (The diversity of possible approaches also lends credence to the argument that fellowship stipends are not self-employment income, because if they were they would all be reported on 1099-MISC forms in Box 7.)

Some universities will not communicate with either the IRS or the fellowship recipient regarding the fellowship pay, and some will send only an unofficial ‘courtesy letter to the recipient to alert her to the amount of her fellowship income.

Some universities choose to report this non-compensatory income on a 1098-T. However, the purpose of the 1098-T is to help students and parents of dependent students claim a tax credit or deduction, so some people might disregard it if it cannot be used for that purpose (i.e., the amount listed in Box 5 is greater than or equal to the amount listed in Box 2, which is typical for graduate students receiving stipends).

Likewise, reporting fellowship income on a 1099-MISC Box 3 is also an ‘off-label’ use of the form. While it is used for reporting awards and prizes, scholarship and fellowship income is not explicitly listed in the IRS documentation as a type of income that should go into Box 3.

My guess is that universities most often use the 1099-MISC for reporting purposes because they have given the students the option of having taxes withheld from their stipends and they have to find a way to report the amount of federal and state tax withheld. The 1098-T reporting option does not allow for tax withholding, and therefore grad students are often compelled to file quarterly estimated tax. So the upside of offering grad students the option of having taxes withheld comes with the downside of using the 1099-MISC, which creates confusion over self-employment.

Further ‘proof’ of the distinction between fellowship and self-employment income comes from IRS Publication 970, which specifically discusses the tax implications of scholarships and fellowships. Non-compensatory income that is in excess of the student’s qualified education expenses should be reported as income in line 7 of the 1040. Self-employment income, on the other hand, is tabulated on a Schedule C and then reported in line 12. Even the 1099-MISC form itself instructs people with Box 3 income to report it in line 21 (Other income) of the 1040, which is incorrect for fellowship income but at least avoids the self-employment designation (and will probably result in a proper tax calculation).

At tax time and particularly when preparing your tax return, it’s important to be clear that you are not self-employed. People who are self-employed pay double the FICA tax that an employee does, whereas fellowship recipients are exempt from paying FICA tax on their fellowship income (and even if their fellowships were considered wages, they would have a student FICA exemption).

Stay tuned for ‘lies’ 4 and 5 for more details on this topic! See the tax lies home page for a full list of tax lies that graduate students should not fall for.

We at Grad Student Finances are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.

 

22 thoughts on “Grad Student Tax Lie #2: You received a 1099-MISC; you are self-employed.”

  1. The instructions for the 1099-MISC actually say that the form should not be used for reporting scholarships. I have pasted a paragraph from the instructions below:

    Scholarships.
    Do not use Form 1099-MISC to report
    scholarship or fellowship grants. Scholarship or fellowship
    grants that are taxable to the recipient because they are paid
    for teaching, research, or other services as a condition for
    receiving the grant are considered wages and must be
    reported on Form W-2. Other taxable scholarship or
    fellowship payments (to a degree or nondegree candidate)
    do not have to be reported by you to the IRS on any form.
    See section 117(b)-(d) and Regulations section 1.6041-3(n)
    for more information.

    1. While I agree with you that the 1099-MISC isn’t a great form for reporting fellowship income – there isn’t one, it seems – reporting fellowship income on the 1099-MISC isn’t technically in violation of this instruction because they are not “for teaching, research, or other services as a condition for receiving the grant.” Apparently the universities and IRS think that fellowship income doesn’t (officially) come with work strings attached, though in practice we all know it does.

  2. The IRS clearly states on page 2 of its Instructions for Form 1099-MISC, “Do not use Form 1099-MISC to report scholarship or fellowship grants.”

    Therefore, do not report Fellowships on a 1099-MISC.

    2 options are given to the Institution from the IRS Instruction:

    1) Report on a W-2
    2) Don’t report it

    To suggest that an institution can report a Fellowship on a 1099-MISC is against the IRS’s instruction and causes massive confusion to the taxpayer and the IRS if it is reported on 1099-MISC, regardless whether the income is reported on Line 3 or 7.

    Currently, I am dealing with a tax issue and its because the institution elected to improperly use the 1099-MISC for a Fellowship. Because the institution used the 1099-MISC, its triggered an IRS audit that suggests the taxpayer owes thousands more in taxes.

    1. I totally agree with you that reporting fellowships on the 1099-MISC is confusing to the recipient and sometimes the IRS. It’s easy to confuse fellowship pay with self-employment when using the 1099-MISC. The purpose of this post is to help students who do receive a 1099-MISC to understand it and pay the proper amount of tax.

    2. What did you do in this situation? I now owe over $4000 because my institution put my graduate stipend on a 1099-MISC. The IRS audited me and considered me self-employed, even though I reported this information on a 1040. It says my information and the information my institution provided “do not match.” Which claims I underreported almost $20,000.

      1. Thanks for your question! You should definitely push back against the IRS’s misconception. Where did you report the income initially – line 7 or line 21? If it was in line 21 you can offer to amend the return to report it in line 7. Perhaps you can get your fellowship source to write a letter as well.

        This blog post details the process that another grad student went through for a similar problem.

    1. That type of reporting does indicate that the award is a fellowship/scholarship/grant and taxable. However, if you have qualified education expenses you can balance them against the scholarship to make it tax-free (see this post and Publication 970 Chapter 1). There may be other education benefits you can take to reduce your tax burden. Even if you exhaust all your education benefits, if your income is low enough, you won’t end up paying any tax because you can take standard deduction and an exemption (if you’re not a dependent).

  3. I have a 1099-MISC for undergraduate research stipends and the amounts are reported in Box 3. If I understand your article correctly, you’re saying that I owe no FICA taxes?

    1. Your situation fits the pattern as I understand it, yes. You received a fellowship grant (or some other type of non-wage pay) as your stipend, so that is not subject to (either side of) FICA tax. Your situation is a little outside of what I normally see because you may not have been enrolled as a student during that time/at that institution so you may not have qualified for the student FICA exemption, but as long as your pay is not wages that shouldn’t matter. In any case, if you had been self-employed the amount would have appeared in Box 7.

  4. I Have 1099-Misc received for amount 1737 on box 7 for teaching assistant work which I helped professor. How should I report this Income to IRS

    1. 1099-MISC Box 7 indicates self-employment income. Did you arrange an independent work situation with the professor – not the typical route for TAs? Sign any contracts? This is highly unusual. If you had a very typical employment situation, this reporting may be a mistake. Follow up with the professor and the department about this. You do not want to be labeled as self-employed if you weren’t in reality because you’ll have to pay a bunch extra in tax.

      If you really were self-employed, just follow the 1040 instructions or software instructions for entering it. After you deduct any business expenses on Schedule C, you’ll report your net self-employment income in line 12 of the 1040 and also file a Schedule SE.

  5. This is different but related, I think. My daughter garduated in 2016 and got an intenship paid with a fellowship in the summer of 2016. She did not receive a W-2 or 1099-Misc.How do we report this? I plan to claim her as a dependent this year.

    1. If you’re sure it was a fellowship, this is where you report it on her tax return: http://www.gradstudentfinances.org/where-to-report-your-grad-student-income-on-your-tax-return/

      I don’t know how her being a dependent changes the situation except that you can claim her educational benefits, but if you aren’t planning to make the fellowship tax-free (I’m not sure you can anyway because she was no longer a student) I guess that doesn’t make a difference.

  6. I got a grant/scholarship through an organization I am a part of. They sent a 1099 MISC with box 3 filled in with the amount. How do I file this, or do I file it at all?

  7. I had an 9 month internship which was a requirement to recieve my masters degree. While on the internship I was required to pay tuition to my school although I had no classes or other contact with the school.
    I was paid a stipend while at the internship and received a 1099-misc with the amount in box 3.
    Should this income be reported on line 7 or line 21 of form 1040?
    Also can this income be reduced by the amount of tuition I paid or just by the amount allowed in the tuition and fees deduction from form 8913?

    1. I would check with your internship that the salary you were paid was a “fellowship” or “scholarship” and if yes report it in Line 7. (My guess is that it is.) I think in that case you could also make part/all of it tax-free using your qualified education expenses. But if it’s not a scholarship/fellowship, it would go into Line 21 per the instructions.

  8. My son received a fellowship last year to go do research in Europe over the summer. We received the 1099-misc with no taxes withheld for those monies received. I started completing his taxes, filled in amount in box 3 and it calculated him owing a substantial amount of taxes (I tried putting the same amount in box 7 and the taxes owed came out even higher). He does have a part time job, not sure if that makes much difference, he received a sizeable scholarship for the previous year for just his schooling so I am not sure if he would have much deductions to offset this fellowship. How can he make this overage qualified education expenses? Or should he just go ahead an be prepared to start paying the irs because he didnt get taxes withheld?

    1. Just make sure that you enter this income as fellowship income and that you’ve accounted for all his qualified education expenses. It sounds like he simply owes tax on his income, which is pretty normal to expect.

      1. And what is your opinion about whether the student mentioned here would be allowed to deduct per-diem travel expenses while away from home in Europe, against his 1099MISC box 3 income.

        1. Well, if we’re going off the premise that this is fellowship income, travel and research expenses are not allowed qualified education expenses.

Leave a Reply

Your email address will not be published. Required fields are marked *