What Is a Stipend and Should You Offer Them to Employees? 

In a competitive labor market, offering a salary and health insurance is simply not enough to attract the best job candidates. Many companies are now considering the addition of stipends to enhance total compensation packages and attract top talent.

In this post, we'll cover:

  • What is a Stipend?
  • What are the Key Differences Between a Stipend and a Salary?
  • Are Stipends Taxable?
  • Types of Stipends
  • Why You Should Offer Stipends

What is a Stipend?

A stipend is a fixed sum of money given to employees to defray various costs such as commuting expenses, gym memberships, and home internet.

Sometimes stipends are referred to as a fringe benefit or lifestyle spending account (LSA).

What are the Key Differences Between a Stipend and a Salary?

The main difference between a stipend and a salary is that the latter is regular pay given to employees for work performed. Conversely, stipends are a form of financial aid used for defraying living expenses or travel expenses. Although a stipend and a salary are both considered a fixed sum, the latter is often modified based on merit and output, whereas a stipend remains a fixed amount of money regardless of performance.

Another difference between a stipend and salary is that the latter is paid to W-2 employees, who are subject to minimum wage requirements, as well as overtime pay. The federal minimum wage is currently $7.25 per hour for covered nonexempt employees and $2.13 per hour for employees who receive tips. If the minimum wage and the amount of tips received doesn't equate to at least $7.25 per hour, the employer is obligated to make up the difference. Overtime pay is 1.5x your regular pay rate for any hours worked over 40 in a workweek.

In contrast to paying hourly wages or a regular salary, a stipend is given only at the sole discretion of the employer. Under the Fair Labor Standards Act (FLSA), any stipends paid may be lower than the minimum wage as long as they're reserved for trainees.

Although you can't pay a W-2 employee with a stipend rather than hourly wages or a regular salary, you can bestow a recurring stipend upon said employee as additional compensation to their base pay. In this manner, stipends serve as fringe benefits or bonuses as part of a comprehensive benefits package.

Are Stipends Taxable?

While regular pay for W-2 employees is subject to tax withholding by employers, stipends aren't classified as wages. Therefore, employers will neither withhold income taxes nor withhold Social Security taxes and Medicare taxes.

However, most stipends are considered taxable income by the Internal Revenue Service (IRS), which means employers are responsible for payroll taxes and recipients still have to pay federal and state taxes on the amount. HR leaders considering stipends as fringe benefits for their workforce should check with the IRS regarding tax implications.

For example, the IRS considers stipends related to health and wellness initiatives as taxable income. Conversely, stipends for parking and public transit expenses, can be funded by employees' pre-tax dollars up to a designated limit. As of 2023, the IRS allows employers to withhold up to $300 per month for pre-tax commuter benefits, such as qualified parking, commuter highway vehicle transportation and transit passes.

When it comes to tax return reporting, recipients must record their stipends when filing. Students who receive stipends (often referred to as a "taxable scholarship" or "taxable grant scholarship") should report the amounts used for incidental expenses, such as room and board, travel, and optional equipment, as well as amounts received as payments for teaching, research, or other services, when filing their taxes.

The IRS considers stipends used for tuition and fees required for enrollment or attendance at an educational institution, or for fees, books, supplies, and equipment required for courses, as tax-free and not needed to be reported.

Types of Stipends

There are several types of stipends to cover the cost of work expenses, travel expenses, and living expenses.

Career development stipends

A 2022 study by the University of Phoenix indicates that 40% of employees are worried that their skills will become outdated because of advancements in automation and artificial intelligence (AI). As a result, more companies are ramping up learning and development, providing stipends to cover training costs and offering additional job training opportunities. For example, career development stipends typically cover expenses like attending classes, workshops, and conferences.

With more workers interested in continuing education, tuition credit has emerged as one of the most highly valued benefits in recent years. Through 2025, employers can continue to make contributions of up to $5,250 per employee annually toward eligible education expenses without raising the employee's gross taxable income under Section 127 of the Internal Revenue Code.

Health insurance stipends

Instead of enrolling trainees in their health insurance plan, employers may offer a health insurance stipend to mitigate the cost of coverage from another provider.

Academic research stipends

Institutions typically offer academic research stipends to cover expenses for graduate students and researchers, allowing them to focus solely on their projects rather than having to work a full-time or part-time job to make ends meet. A graduate student may also receive a stipend from a third-party organization interested in the research.

Wellness stipends

Since the COVID-19 pandemic, employee well-being has become an even greater priority for HR leaders. To promote a healthy workforce, more companies are offering wellness stipends to cover the cost of gym memberships, yoga classes, at-home fitness equipment, meditation apps, and other wellness expenses.

Perk stipends

Compt specializes in perk stipends, which are sums of money dedicated to lifestyle benefits. Furthermore, the 100% IRS-compliant reimbursement platform offers ultimate customization, allowing team members to spend on goods or services that they find meaningful.

Family stipends

With Compt, you can create a family stipend, which is a sum of money given to employees in addition to their compensation to help them pay for family-related expenses, such as child care, elder care, fertility services, adoption, even pet care.

Other stipends you can offer through the Compt platform:

Why You Should Offer Stipends

Nearly half (46%) of American workers aren't content with the benefits package their employer currently offers, according to a 2023 survey by Forbes Advisor. And they'll do more than pout about it – 40% of employers believe workers leave their job to find employment that offers a better benefits package.

That's why offering additional benefits like stipends can increase morale, employee engagement, and ultimately, retention. For example, a stipend specifically dedicated to career development is a win-win: employees have their training costs covered, and employers have a more workforce. In fact, more than two thirds (68%) of workers said they would stay with their employer throughout their career if the employer made an effort to upskill them, according to the University of Phoenix.

Paying stipends can also enhance your recruiting efforts. Top talent expects more from employers than ever before. Companies that offer stipends demonstrate that they're invested in their employees and candidates holistically, providing financial support for their professional and personal growth. That raises their profile in this red hot labor market.

From a purely financial perspective, companies also benefit from stipends that aren't taken advantage of. Considering that most stipends are only used after employees seek reimbursement, the remaining funds can be recouped at the end of the monthly or annual cycle. Of course, employers can decide to allocate those funds into different types of stipend that would be more popular among staff.

Final Thoughts

To successfully compete in the war for talent, create an all-encompassing employee value proposition that caters to workers' physical, mental, and financial needs. Stipends work to improve an employee's personal finance situation by helping offset living expenses, training costs, wellness expenses, commuting costs, you name it.

If you're truly committed to caring for talent both inside and outside the office, stipends are worth the investment.

Compt is the #1 employee stipend platform. Click here to learn how we can help your company implement an inclusive, tax-compliant stipend program.

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