Education: Graduate student summer internship tax treatment

[lily32]

I am a graduate student who is filing taxes for a summer internship I performed in Summer 2024, and I have a question on the payment received by the company, as I received a 1099-NEC form. See below:

• Situation: This was a third-party startup company internship that was available through and partially subsidized by my school (stipend program for a summer internship experience if a company does not have the funds to fully compensate them, the school will provide a stipend / scholarship, so the total compensation is a certain amount). The school paid for a majority amount of $X (which was not part of the 1098-T, but I included under "Education - Other Scholarships/Grants/Fellowships", no questions here) and the third-party company paid for a portion $Y. I received a 1099-NEC, which is for independent contractors.
  
  • Education component: I am a fully enrolled graduate student who takes classes full time throughout the year, with the exception of Summer 2024 for the internship. I am required to complete a 6–12-week full time summer internship as part of the work experience degree requirement and this work experience is a graduation requirement. Does this mean I should be exempt from self-employment FICA tax ("performs services as an incident to and for the purpose of pursuing a course of study")? 
  • Employee vs. independent contractor component:
    • Behavioral:
      
      • Type and degree of instructions given: Had weekly check-ins to discuss work done and top priorities for the week; degree of instruction depended on task - some had little (e.g. email and reach out to X potential partners) and some had more direction (e.g. brainstorming together new initiative)
      • Evaluation systems & training: Had an initial onboarding, then subsequent weekly check-ins and feedback on work done over the internship period
    • Financial:
      
      • Did not have significant investment, unreimbursed expenses, or opportunity for profit and loss (used personal laptop, occasional commute expenses)
      • Services available to the market: I did not advertise, have a visible business location, or would work in this role otherwise (have not previously worked directly in this type of role). If I had not done this internship, I would have had to find another summer internship for work experience that may or may not have been similar to this role
      • Method of payment was bi-weekly via bank transfer, totaling the flat $Y amount over the internship period
    • Type of relationship:
      • Written contract: I received an offer letter that explicitly states I have a full-time internship position with a start and end date who I report to and my responsibilities
      • No employee benefits
      • No expectation that the internship/work would extend beyond project time to a full time role
      • Services provided as key activity: My work was presented as the company's own and I do not control or direct it
• Questions (and would appreciate any additional IRS guidance / verbiage for clarity if possible so I can double check that I am reporting correctly): 
  • Should the third-party portion of the stipend be considered nonemployee compensation (e.g.  employee vs. contractor)?
    • If not, what form should I have gotten / how should this be reported (e.g. within Education - Other Scholarships/Grants/Fellowships)?
    • If the 1099-NEC is correct, how do I fill out the Schedule C as I technically was not operating a business or a sole proprietor practitioner? It requires me to fill out business information, code, accounting method, whether I issued payments requiring a 1099, etc.

[KrisD15]

Form 1099-NEC was resurrected a few years ago in order to distinguish Self-Employment income from everything else. 

Unfortunately, there are people that issue payroll and tax forms that don't use the correct form.

No, you were not really paid as a sub-contractor, so they should not have issued Form 1099-NEC.

I think they should have used Form 1099-MISC.

If the school paid it all, it could be reported as scholarship income, but since the business paid some, it would be "Other Income". 

Since you are "stuck" with Form 1099-NEC, enter it and choose "Hobby" as the type of income it represents. 

That way it is taxed as other income (subject to income tax) but not Self-Employment tax (FICA).

You also won't need to upgrade to file Schedule C.

[Hal_Al]

The answer is not clear cut and you're no going to find any conclusive IRS guidance.

@KrisD15  said " but since the business paid some, it would be 'Other Income'."  It can be reported that way and that is better than Schedule C.

Even though that amount was not paid directly by the school.  I think you can (and should)  treat it as an education stipend.  Enter the same way you did the school's payment (as additional scholarship, in the education section). 

"Other income" is treated as unearned income.  

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

Taxable scholarship goes on line 8r of Schedule 1, from which TT treats it as hybrid income.