Tax Rules for Student Interns

Student interns do not fall into any special tax category. However, there are a number of tax rules that student interns and their employers need to consider. Interns may work for for-profit firms, schools or non-profit organizations. The tax implications of an internship are somewhat different depending on the type of organization the student works for.

An internship provides you with training and real-world experience that enhances classroom knowledge. You may work as an intern for a for-profit firm. Your employer must treat you as a regular employee for tax purposes. This means deducting taxes from your paycheck and paying employer payroll taxes, including unemployment taxes. Since your tenure as an intern is temporary, the length of the internship and any limitations on eligibility for job-related benefits should be spelled out in the contract.

When a non-profit organization or school hires an intern, the tax rules are normally the same as for for-profit companies. However, non-profits can offer you a student internship and compensate you with a stipend. You must agree to work as a volunteer. The stipend is considered a nominal payment and may not exceed 20 percent of what an employee would make doing the same job. The organization must report the stipend to the Internal Revenue Service when it is more than $600 in one year. If you receive a stipend, you will get a Financial Statement in lieu of a W-2. Non-US residents get a 1042S form instead. Reporting any taxable portion of a stipend on your tax return is your responsibility.

Read More: What Can You Gain From an Internship?

Both for-profit and non-profit organizations can offer unpaid student internships. If the intern isn’t paid, there are no tax issues. However, since 2018, courts have used a "primary beneficiary test" to determine which party, the employer or the intern, is primarily benefiting from the relationship. The U.S. Department of Labor, Wage and Hour Division has identified these seven factors as part of the test:

• "The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee – and vice versa."
• "The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions."
  
• "The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit."
  
• "The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar."
  
• "The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning."
  
•  "The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern."
  
• "The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship."
  

When you are paid wages, the earnings are taxable income just like wages for any other job and must be reported when you file your tax return. You can deduct job-related expenses as other employees do. A stipend may be exempt from taxes if certain conditions are met. The stipend may not be payment for services performed. For example, the stipend might be paid to enable you to complete school-related research while any work you do is unpaid.

The stipend money usually needs to be paid directly to your school and used to pay tuition and fees or other expenses required as a condition for enrollment, such as books, supplies or equipment. Any part of the stipend not used for such expenses is income that you have to report on your tax return and is taxed as wages.

When you work as a student intern and you are classified as a nonprofit volunteer instead of an employee, you can't deduct job related-expenses or any of the time you put in. However, you may be able to take a deduction for travel expenses if they are incurred while you are performing a service for the organization. If you spend your own money to get your work done, such as paying for stamps or copier fees, you can write the cost off your taxes if the organization does not reimburse you.

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