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.

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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.

4 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.

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