Are my interns getting screwed?
June 24, 2016 8:58 AM Subscribe
My university department was recently awarded an industry grant to provide minority students summer internships working with us. For some reason this program has gone a bit... sideways. Unlike our other hourly student employees, this cohort is being paid a monthly stipend, and issued a 1099 instead of a W-2. Is there some gray area between independent contractor and employee I'm not aware of?
These interns are very junior; all freshman who've completed a single year at a community college. We will have to invest a lot of our time into training them, and we don't have a low stakes project set aside specifically for the interns, so they're going to be working alongside the rest of our staff. By pretty much everything I've seen online, these students are employees, and I was told to treat them more or less as such (we've apparently set their work week to 9-5 with an hour lunch break).
As best I can tell, upper management set it up this way in part because we advertised a specific dollar amount on fliers distributed to CC counselors, and the tax withholdings was problematic in some way. Our budget has been very tight the past few years, and I suspect avoiding the payroll tax was a also factor. At the very least, we're doing this for our convenience, not theirs, as we've done summer hourly W-2 employees in the past (though not "interns"). I suspect all of them are going to be very surprised come tax time.
So if the dichotomy is independent contractor versus employee, this seems clear cut. But like, is there some magic wand university accounting can wave to declare these interns as some third thing, or should a more prudent management team be banking money for an IRS reclassification judgment next April?
These interns are very junior; all freshman who've completed a single year at a community college. We will have to invest a lot of our time into training them, and we don't have a low stakes project set aside specifically for the interns, so they're going to be working alongside the rest of our staff. By pretty much everything I've seen online, these students are employees, and I was told to treat them more or less as such (we've apparently set their work week to 9-5 with an hour lunch break).
As best I can tell, upper management set it up this way in part because we advertised a specific dollar amount on fliers distributed to CC counselors, and the tax withholdings was problematic in some way. Our budget has been very tight the past few years, and I suspect avoiding the payroll tax was a also factor. At the very least, we're doing this for our convenience, not theirs, as we've done summer hourly W-2 employees in the past (though not "interns"). I suspect all of them are going to be very surprised come tax time.
So if the dichotomy is independent contractor versus employee, this seems clear cut. But like, is there some magic wand university accounting can wave to declare these interns as some third thing, or should a more prudent management team be banking money for an IRS reclassification judgment next April?
I suspect avoiding the payroll tax was a also factor.
Hopefully, you are not privy to the actual reasons, because this is one of the typical reasons that entities who engage independent contractors get stung for shenanigans. A more prudent management team would be speaking with a competent employment and tax attorney, and would be transparent about what it's doing, why, and why it's legal and not shady. Such a management team would be unlikely to have employees wondering what's going on and seeking advice, suggestions or feedback from the Internet peanut gallery.
posted by spacewrench at 9:09 AM on June 24, 2016 [1 favorite]
Hopefully, you are not privy to the actual reasons, because this is one of the typical reasons that entities who engage independent contractors get stung for shenanigans. A more prudent management team would be speaking with a competent employment and tax attorney, and would be transparent about what it's doing, why, and why it's legal and not shady. Such a management team would be unlikely to have employees wondering what's going on and seeking advice, suggestions or feedback from the Internet peanut gallery.
posted by spacewrench at 9:09 AM on June 24, 2016 [1 favorite]
Oh, and in answer to the question in your title, Yes, I believe your interns are probably getting screwed. For example, they are probably not receiving benefits such as health insurance, they are probably responsible for paying 100% of their own self-employment taxes, and (importantly) they are probably unaware (or inadequately aware) of the consequences of at least some of those facts.
posted by spacewrench at 9:13 AM on June 24, 2016 [6 favorites]
posted by spacewrench at 9:13 AM on June 24, 2016 [6 favorites]
This is an awful thing to do to a vulnerable group of students. Can you anonymously tip off your university's GC's office?
posted by praemunire at 9:16 AM on June 24, 2016 [5 favorites]
posted by praemunire at 9:16 AM on June 24, 2016 [5 favorites]
If the interns should be classified as employees, they can file a claim and the company will be held liable for the taxes. This Ask A Manager post isn't a perfect match for your situation, but the answer has some information that should be useful to you.
Here's how the IRS breaks it down, including how classification works and what happens when someone is misclassified.
If the interns are being misclassified, the company is going to be way screwed.
posted by meemzi at 9:16 AM on June 24, 2016 [1 favorite]
Here's how the IRS breaks it down, including how classification works and what happens when someone is misclassified.
If the interns are being misclassified, the company is going to be way screwed.
posted by meemzi at 9:16 AM on June 24, 2016 [1 favorite]
I am not a tax lawyer, this is not tax advice: you should not give these interns tax advice either.
However, you might be able to somehow expose them to this information: in some circumstances, they may be able to legally report 1099 income sort of as though it were w-2 income, by literally writing "SCH" in the margin, as described here.
(Yes, these kids are likely getting screwed, but it might be a legally sound screwing, and it might also teach them important life lessons, e.g. to look into how they are getting paid/taxed before accepting a post)
posted by SaltySalticid at 9:44 AM on June 24, 2016
However, you might be able to somehow expose them to this information: in some circumstances, they may be able to legally report 1099 income sort of as though it were w-2 income, by literally writing "SCH" in the margin, as described here.
(Yes, these kids are likely getting screwed, but it might be a legally sound screwing, and it might also teach them important life lessons, e.g. to look into how they are getting paid/taxed before accepting a post)
posted by SaltySalticid at 9:44 AM on June 24, 2016
Fellowships are in general really complicated, and sometimes aren't taxed as regular income. I only speak from my own experience, when I had a fellowship that I didn't have to pay tax on. They might not be getting screwed if this counts as the appropriate type of fellowship (and maybe the rules have changed since they affected me).
posted by lab.beetle at 10:19 AM on June 24, 2016 [5 favorites]
posted by lab.beetle at 10:19 AM on June 24, 2016 [5 favorites]
Interns are not legally required to be paid, so a stipend might exceed the legal requirement. Determining whether a position qualifies as an internship (rather than an employee) is complex, but based on the information you provided, it certainly seems plausible that these positions qualify.
If you're interested in pursuing this, you could start by anonymously contacting your state labor office and getting more information.
posted by Mr.Know-it-some at 10:43 AM on June 24, 2016 [1 favorite]
If you're interested in pursuing this, you could start by anonymously contacting your state labor office and getting more information.
posted by Mr.Know-it-some at 10:43 AM on June 24, 2016 [1 favorite]
This information from Looksharp, which specializes in placing people into internships is not definitive, but I think it's instructive. Notice the last paragraph, which might apply to the interns you are describing.
Can interns be setup as independent contractors?
The IRS defines independent contractors as individuals, who have their own legal entities, do not require supervision or direction in completing a project and who provide their own tools to do their work. The vast majority of internships do not meet these requirements, although some virtual internships can be the exception, though this is a gray area.
Having a legally compliant internship eliminates the risk of getting sued for back wages, can be a source of pride for your organization and interns, and helps make the entire process smoother.
Can I pay with a stipend? If so how?
Paying interns under minimum wage is illegal for most for-profit companies. Therefore there is no proper process to pay interns at a for-profit with a stipend. In our experience, most companies who utilize stipends usually do so by issuing students a 1099 form (designating interns improperly as contractors). This requires the intern to manage their own tax deductions from their paycheck, a process that most students are not very familiar with. The stipend approach is a widely utilized, under penalized, but typically improper approach to hiring interns.
Non-profits are the exception to the rule. They can classify interns as volunteers and then pay the stipend as a “nominal fee.” The fine print says that the stipend cannot exceed 20% of what would have been paid to a worker performing the same job and cannot be related to the number of hours worked by the intern. Stipends over $600 a calendar year must be reported as 1099 income; however, stipends under this amount do not need to be reported.
posted by layceepee at 11:16 AM on June 24, 2016
Can interns be setup as independent contractors?
The IRS defines independent contractors as individuals, who have their own legal entities, do not require supervision or direction in completing a project and who provide their own tools to do their work. The vast majority of internships do not meet these requirements, although some virtual internships can be the exception, though this is a gray area.
Having a legally compliant internship eliminates the risk of getting sued for back wages, can be a source of pride for your organization and interns, and helps make the entire process smoother.
Can I pay with a stipend? If so how?
Paying interns under minimum wage is illegal for most for-profit companies. Therefore there is no proper process to pay interns at a for-profit with a stipend. In our experience, most companies who utilize stipends usually do so by issuing students a 1099 form (designating interns improperly as contractors). This requires the intern to manage their own tax deductions from their paycheck, a process that most students are not very familiar with. The stipend approach is a widely utilized, under penalized, but typically improper approach to hiring interns.
Non-profits are the exception to the rule. They can classify interns as volunteers and then pay the stipend as a “nominal fee.” The fine print says that the stipend cannot exceed 20% of what would have been paid to a worker performing the same job and cannot be related to the number of hours worked by the intern. Stipends over $600 a calendar year must be reported as 1099 income; however, stipends under this amount do not need to be reported.
posted by layceepee at 11:16 AM on June 24, 2016
Another angle I would probably be concerned about here is that from what you've written, it sounds like your company is paying minority interns through this hinky way that will both mess up their taxes and cause their effective wage to be lower, but has paid other groups of student workers (who may or may not have been minorities, or at least probably weren't exclusively from minority groups) at a higher rate. That just sounds like a whole world of trouble...
posted by rainbowbrite at 11:29 AM on June 24, 2016 [4 favorites]
posted by rainbowbrite at 11:29 AM on June 24, 2016 [4 favorites]
I did a couple of NSF-funded REUs as an undergrad, which probably exists in a similarly confusing world to your interns. Once I got a W-2 and payroll tax was withheld and the other times was treated the same way as a scholarship (i.e. not taxable if used for things like tuition/books). I can't remember what form I got those years, but it was neither a W-2 nor a 1099 (but I don't think it was a 1098-T either, so it wasn't strictly a scholarship...).
posted by hoyland at 4:27 PM on June 24, 2016
posted by hoyland at 4:27 PM on June 24, 2016
The short answer is "yes." The long answer is that they are funded in such a way that taxes are complicated, etc. because it is a federal grant, but HR won't give enough contextual information for anyone to figure out was is going on, blah blah blah.
I was funded for the first two years of my PhD by a federal grant and taxes were a nightmare because, though they were withheld accordingly, the university considered me a contractor and so I received a 1099. It was unpleasant and in the end, I had to pay a load of State taxes that were not accounted for.
So, my guess is that the long answer is likely "yes."
posted by paco758 at 5:35 PM on June 24, 2016
I was funded for the first two years of my PhD by a federal grant and taxes were a nightmare because, though they were withheld accordingly, the university considered me a contractor and so I received a 1099. It was unpleasant and in the end, I had to pay a load of State taxes that were not accounted for.
So, my guess is that the long answer is likely "yes."
posted by paco758 at 5:35 PM on June 24, 2016
A university is generally a non-profit organization, not for-profit. An industry grant may or may not have stipulations about how it must be spent, but the university is obligated to follow the terms of any grant they accept.
When I ran a grant program giving money to teacher grantees, the state issued their grant dollars as a stipend by paying it via a specific budget line set up for this exact thing. The grantees received a 1099 but owed no tax on it since the funds were considered a stipend. We spent a considerable amount of research time finding the correct budget line, as other similar budget lines DID require that grantees include the income as taxable income on their taxes.
If this is a state university (and perhaps even if it is not), the grant proposal was submitted to their Grants and Contracts Department prior to submittal. Grants and Contracts reviews the grant specifics in detail to be sure every proposed expenditure is legal and acceptable to the university.
All this to say, I think it's quite possible that there's nothing untoward going on here.
posted by summerstorm at 6:13 PM on June 24, 2016
When I ran a grant program giving money to teacher grantees, the state issued their grant dollars as a stipend by paying it via a specific budget line set up for this exact thing. The grantees received a 1099 but owed no tax on it since the funds were considered a stipend. We spent a considerable amount of research time finding the correct budget line, as other similar budget lines DID require that grantees include the income as taxable income on their taxes.
If this is a state university (and perhaps even if it is not), the grant proposal was submitted to their Grants and Contracts Department prior to submittal. Grants and Contracts reviews the grant specifics in detail to be sure every proposed expenditure is legal and acceptable to the university.
All this to say, I think it's quite possible that there's nothing untoward going on here.
posted by summerstorm at 6:13 PM on June 24, 2016
I'm going to go out on a limb and say that they were hired as paid interns to avoid University hiring hassles rather than straight tax issues. I don't know what University you are in, but I've been involved in University hiring and holy moly, it was crazy making, took months and we had to actually write out for each person who did not get the position, why they did not get the position and why they were not as qualified as the person who was hired.
Also, I bet as interns they are not entitled to a lot of stuff they would as employees but also aren't required to do a lot of things as well - such as new hire trainings...by training, I mean: sexual harassment training, employee rights training, online security training - all things that are typical for new hires at Universities?
Does this screw them? Maybe or maybe it just makes hiring them for 3 months easier on everyone. Interns included.
posted by Toddles at 8:15 PM on June 24, 2016
Also, I bet as interns they are not entitled to a lot of stuff they would as employees but also aren't required to do a lot of things as well - such as new hire trainings...by training, I mean: sexual harassment training, employee rights training, online security training - all things that are typical for new hires at Universities?
Does this screw them? Maybe or maybe it just makes hiring them for 3 months easier on everyone. Interns included.
posted by Toddles at 8:15 PM on June 24, 2016
Not that it's okay, but this is a common thing. I got stipends throughout college for various internships and had tao set aside money to pay taxes at the end of the year. The first time I got a stipend I didn't know that and it was a surprise come filing season. My university did have a differentiation between summer employment for professors and internships, however -- and th ose were stipends awarded by the school to students doing work for other organizations. I have many friends who were given stipends in college, because it cost less for the employer. Unfortunately it's rare to get a paid internship so most people are just glad to be getting anything.
posted by mmmleaf at 9:29 PM on June 25, 2016
posted by mmmleaf at 9:29 PM on June 25, 2016
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