What to be aware of when getting paid non-taxable income?

March 7, 2013 8:43 AM

I am taking a new position where I am paid a non-taxable income/stipent. Essentially my position is funded through a grant. I am not a student, this is a full-time and temporary. I am afraid when I go to file my taxes next year something might come up where I do have to pay taxes. I guess I don't fully trust the government in not wanting to place their sticky hands on my money! Is there anything I should be aware of? Should I file my taxes a certain way?
posted by melizabeth to Work & Money (9 answers total)

Who told you the income is not taxable? There is a difference between income that is not taxable to you the employee, and income on which the employer doesn't have to withhold taxes. If the employer isn't withholding taxes but the income is taxable to you, you may have to make estimated tax payments yourself to avoid underpayment penalties come tax time.

IANACPA but even if I were, there is not nearly enough information in your question to assess your tax situation.
posted by payoto at 8:51 AM on March 7, 2013 [10 favorites]

With very limited exceptions, earned income is taxable. The fact that your position is funded through a grant doesn't change that. You need to talk to an accountant.
posted by ewiar at 9:03 AM on March 7, 2013 [2 favorites]

I agree with payoto. My husband is a perpetual grad student, and any stipend he makes which does not go directly to qualified educational expenses (tuition, essentially, although there are some other qualified expenses) is "taxable." However, his employer is not required to withhold federal taxes or Medicare/social security.

That being said, your income level may still be low enough that you don't owe taxes, but it is still 'taxable.' I would look for free or low-cost tax advice ASAP to make sure that your income level is not high enough to require estimated quarterly tax payments.
posted by muddgirl at 9:04 AM on March 7, 2013 [5 favorites]

Yeah I agree with payoto, it sounds to me like they are just paying you without withholding taxes, not that the income itself isn't taxable. I know a number of people in grant funded positions and they are all required to pay taxes on their income.
posted by magnetsphere at 9:04 AM on March 7, 2013

When I have been funded on a grant, taxes were not withheld from my paycheck by my employer (there was no option to have them do so). The income was nevertheless taxable, and I had to pay estimated quarterly taxes throughout the year on that income to avoid a non-payment fine at year end. There's a difference between income that is not subject to tax withholding and income that is just plain not subject to taxation. I'm not sure which your situation is, but the link above should help you if it is the former.
posted by pemberkins at 9:05 AM on March 7, 2013 [5 favorites]

Specifically, the amount you include on your 1040 line 7 must include "Scholarship and fellowship grants not reported on Form W-2" (less any money spent on tuition and course-related expenses), according to IRS instructions. It's not uncommon for taxes not to be withheld during the year in academic and research environments (sorry about the quadruple negative), but tax must still be paid.
posted by Mapes at 9:06 AM on March 7, 2013 [1 favorite]

You can read about estimated taxes and whether you'll have to pay them on the IRS site. I know that you're neither a small business nor self-employed, but the principle is the same if your employer has not required you to submit a W-4 and is not withholding taxes.

You may also owe state taxes. That is a whole different kettle of fish.
posted by muddgirl at 9:10 AM on March 7, 2013

Also, if you're worried, I think there won't be any *penalty* if this is your first year with this income source and you paid taxes (withheld or estimated) equal to at least last year's income, so you have one year to figure it out. But I suspect you'll have to pay *taxes* at tax-time, at least -- it's just the payroll taxes (SS, Medicare, whatever) that you're not liable for. I had grad school stipends like that for many years, and when I later had a "regular job," you could see the funny-looking gap in my contributions to Social Security. (but sadly, no gap in my donations to the IRS)
posted by acm at 9:40 AM on March 7, 2013 [1 favorite]

Despite acm's experience, it's unlikely that she will be exempt from payroll taxes. Some (but not all) students are exempt from payroll taxes, but the questioner is not a student.
posted by Mr.Know-it-some at 10:42 AM on March 7, 2013