Question about Tax Treatment of ORISE Internship "Stipend"

[TomG6]

Hi @Hal_Al 

I have a question.  My son is an undergraduate student.  He is getting an internship this summer through ORISE.  He will be doing research sponsored by ORISE at an Air Force Base, but the paperwork clearly indicates he is not an employee and "You will be considered a program participant and will not enter into an employee/employer relationship with ORISE, ORAU, DOE, or any other office or agency."  He will be getting paid a "stipend" of $2500/month.  ORISE said the stipend is not a "wage" and they won't take out any taxes, provide a W-2, etc.

I am trying to figure out how to treat this "stipend" for tax purposes.  The only words they use are "internship" and "stipend."  I don't see anywhere where ORISE calls this a "fellowship" or "non qualified scholarship", but is that how I should treat this?  If so, am I correct that this would be considered unearned income for purposes of the kiddie tax?  Or, is this stipend considered something other than a fellowship which can be called earned income (and how would I report that if so)?  He already is in the kiddie tax bracket thanks to a lot of interest income and scholarships above the cost of tuition, so whether or not it is considered unearned income will make a difference.

Additionally, since he has all of the interest income and scholarships, and since ORISE won't be withholding any taxes, it is very likely his taxes owed will be over $1,000.  He hasn't been doing any quarterly payments so far, as his previous presumption was his summer employer would take out enough taxes to keep him below that $1,000 taxes owed threshold (which is what happened last year).  Since that isn't the case this year, should he start making quarterly payments now based on his total tax from last year, and will there be some sort  of penalty for not already doing so in April?  In April, he wasn't anticipating owing more than $1,000 in taxes by the end of the year -- but now he is.

Thanks for any help!  I'm including some language from the ORISE agreement if that helps with my first question above:

"All payments paid by ORISE directly to the Participant or on their behalf are considered taxable by the U.S. Federal government and should be reported annually. This includes stipend payments, .... and other payments to Participant. Stipend payments are not considered wages and should not be reported as such. Participants that will have no tax withheld by ORISE from their payments should consider filing Form 1040-ES on a quarterly basis and pay estimated Federal income taxes to avoid being out of compliance with Federal
regulations about the timeliness of tax payments. By accepting this appointment, the Participant agrees that they are NOT an employee of ORISE or ORAU. Therefore, the Participant understands and agrees that ORISE and ORAU will NOT treat participants as employees for income tax purposes. The Participant acknowledges their understanding and agreement that they are personally responsible for their individual tax preparation and payment."

[Hal_Al]

Q.   If so, am I correct that this would be considered unearned income for purposes of the kiddie tax?  

A. Yes. Student internship research stipends,  such as you describe, are treated as fellowship/scholarships for tax purposes. 

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400).  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.

In TurboTax, enter at Educational Expenses and Scholarships, under Deductions and credits (not the income section).

After answering no to having a 1098-T*, answer yes to qualifying for an exception (that gets you to the entry screens). You will have to go thru the whole education interview to get to the scholarship screen. At the scholarship screen, enter the amount of the grant. When asked if any was used for room and board, answer yes. Then enter the amount you want to be taxable (usually all of it), in the pop up box. R&B are not "qualified educational  expenses".  So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.  This will put it on line 8r of Schedule 1 (this line is new for 2022-3).

*If you do have a 1098-T, one of the follow-up questions will be do you have any scholarships not shown on the 1098-T. Enter the additional scholarship/stipend there.  

[TomG6]

Thanks @Hal_Al  !  That is very helpful!  Did you have any thoughts on the 2nd part of my question about should he start making quarterly payments now based on his total tax from last year, and will there be some sort  of penalty for not already doing so in April?  Thanks again!

[Hal_Al]

Q. Should he start making quarterly payments now based on his total tax from last year?

A. Yes.

Q.  Will there be some sort  of penalty for not already doing so in April?

A.  Probably not, since none of the income (apparently) was in received in the first quarter.  You should consider having TurboTax prepare form 2210, using the "annualized method", when he files his tax return.