Official IRS direction on Fellowship Taxes (NOT SE income)

General Discussion for SMART Scholarship Recipients
argentum2f
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Official IRS direction on Fellowship Taxes (NOT SE income)

Post by argentum2f »

I've seen some people talk about reporting fellowship income as self employment (SE) income. I believe this is a mistake! This is not SE income under the spirit or letter of the law, and this subjects us to SE taxes (which are a very high).

The reasoning for reporting it as SE income is because it shows up in Box 7 of a MISC-1099 form, which usually used for things like paying contractors (as I understand it), so tax programs mistakenly assume, if you enter a 1099, that it must be 'business income'.

Here are the official FBI instructions applicable to us:
https://www.irs.gov/pub/irs-pdf/p970.pdf

Note on page 6-7:
How you report any taxable scholarship or fellowship grant income depends on which return you file...
Form 1040. If you file Form 1040, include the taxable
amount in the total on line 7. If the taxable amount was not
reported on Form W-2, also enter “SCH” and the taxable
amount on the dotted line next to line 7"
Given these instructions, can anyone link to any official literature that would indicate we must report as SE income, and why our particular case would be different?

EDIT:
Here's a couple more relevant pieces:
https://www.irs.gov/taxtopics/tc421
How to Report:

Generally, you report any portion of a scholarship, a fellowship grant, or other grant that you must include in gross income as follows:

If filing Form 1040.pdf, Form 1040A.pdf, or Form 1040EZ.pdf, include the taxable portion in the total amount reported on the "Wages, salaries, tips" line of your tax return. If the taxable amount wasn't reported on Form W-2, enter "SCH" along with the taxable amount in the space to the left of the "Wages, salaries, tips" line. If filing Form 1040NR.pdf or Form 1040NR-EZ.pdf, report the taxable amount on the "Scholarship and fellowship grants" line.
And this would seem to indicate that ASEE reported this incorrectly:
https://www.irs.gov/pub/irs-pdf/i1099msc.pdf
Scholarships. Do not use Form 1099-MISC to report
scholarship or fellowship grants. Scholarship or fellowship
grants that are taxable to the recipient because they are paid
for teaching, research, or other services as a condition for
receiving the grant are considered wages and must be
reported on Form W-2. Other taxable scholarship or
fellowship payments (to a degree or nondegree candidate)
do not have to be reported by you to the IRS on any form.
See section 117(b)–(d) and Regulations section 1.6041-3(n)
for more information.
However, I find it unlikely that ASEE would make such an obvious mistake. The program is pretty large, and they must have a few lawyers working on stuff like this to make sure they do it right. So something is still off. The only other thing I can think of is if the SMART payments are somehow not considered a fellowship (maybe because of the service agreement or something?).

EDIT 2: I'm going to keep adding relevant stuff here others find here, so this can be a useful reference for others.

ASEE Tax Memo
ASEE must report all stipend, internship support, health insurance and book allowance payments made... ASEE will provide participants and the Internal Revenue Service (IRS) with the informational Form 1099-MISC recording the amount paid to the participant during the tax year.

You are considered an independent contractor, and not self-employed, and are not employed by either the United States Government or ASEE. If you have further tax questions, please contact the IRS, as ASEE is prohibited from giving tax advice.
This was confusing to me before, but it's starting to make a lot more sense. I think they were legally limited in what they could tell us but were trying to help us avoid making expensive mistakes - like filing as SE. (Thanks to @SMART-ish for posting this on another thread)


This is unofficial advice - but I think it makes the most sense of all the above information:
TurboTAX Q&A
1099-MISC for a stipend payment - where do I put it?
If box 7 reports the stipend, you would have to report it as self-employed income, then enter the same amount as your "business" expense. This will ensure that form 1099-MISC is reported for matching purposes, but the amount is not taxable as self-employment income.
(Thanks to @kbl2017 for finding this link)

**EDIT 3:**
And here is a response from ASEE on the topic:
ASEE made the decision to place all fellowship stipend payments in box 7 based on IRS instructions on identifying the payee relationship, the preparation of the 1099 MISC forms and reporting of various income types, as well as the IRS regulations of handling payments for scholarships, fellowships and other grants. There will be no further advice given in this manner. ASEE cannot provide tax advice so we urge you to seek advice from a tax professional.
Last edited by argentum2f on Fri Feb 16, 2018 2:06 pm, edited 5 times in total.

kbl2017
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Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by kbl2017 »

I think you're right. I cannot figure out how we'd be a special case. Especially given the information we have received.

And to add to that here's an answered question about stipends from Turbotax. (Shared in another thread but also relevant here.) https://ttlc.intuit.com/questions/37849 ... o-i-put-it

argentum2f
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Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by argentum2f »

@kbl2017

Thanks for the link. I think that's the best answer I've seen.

It would seem the correct way to do this (in the absence of internship income) is to NOT report the MISC-1099 as business income at all, but report the amount as a scholarship income. But, this will possibly get the IRS interested in you as their algorithms may not realize that what you reported is linked to the MISC-1099 they receive from ASEE, and you'll have to answer questions later. The link you provided above provides a crude way to fix that, but it seems a little iffy...

My SF waived the internship, but if you have additional internship support payments, maybe that would be SE pay? In that case I'm not sure how ASEE reports it, but if they lump it in with everything else, I imagine you would have to split it out on your own. Then you would report everything as Business income, but deduct just the portion of payments that were 'stipend' payments, and enter those in as scholarship income (?). On the flip side, the ASEE memo specifically mentions 'internship support', and still specifically states that you are 'not self-employed'. So maybe 'internship support' could be counted as part of the stipend - and not be specifically for the work you do over the summer. That does kind of seem to be the way they tried wording things - the internship is meant to be more of an unpaid part of your education, and the support is just stipend support to help with costs of living in a different place?. Yeah, it's all kind of a mess.

kbl2017
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Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by kbl2017 »

Yeah on the support payment being part of the scholarship. Since some people don't receive the stipend but do the same work SMART is able to say it's not in exchange for work and thus still a living stipend. Our paperwork actually said almost the same thing with the NASA USRA internships. Our stipends were in exchange for travel/cost of living in the area we worked for 16 weeks, but they were not in exchange for the internship work.

It is such a mess, but I think with all the info you provided and the crude way of reporting from the Q&A people at least can determine there is a work around for that extra 15% of taxes! Thank you for posting this (and special shout out to the people of reddit who sent me that Q&A link!)

Box3Not7

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by Box3Not7 »

I stopped reading this thread 3 sentences in when you said it was shown in Box 7 (Not really, but it sounds more dramatic). For 3 years of Phase 1, my 1099-MISC from smart has always listed the amount in Box 3. I caution anyone from taking tax advice from a public forum, but how I have always done it is list the income from Box 3 as "Other Income." In my experience this is the only way it can be done with programs like Turbotax requesting information about your self-employment or business that does not exist. The link kbl2017 cited from Turbotax gives this same instruction for Box 3 income.

PhdSMART
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Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by PhdSMART »

Box3Not7 wrote:I stopped reading this thread 3 sentences in when you said it was shown in Box 7 (Not really, but it sounds more dramatic). For 3 years of Phase 1, my 1099-MISC from smart has always listed the amount in Box 3. I caution anyone from taking tax advice from a public forum, but how I have always done it is list the income from Box 3 as "Other Income." In my experience this is the only way it can be done with programs like Turbotax requesting information about your self-employment or business that does not exist. The link kbl2017 cited from Turbotax gives this same instruction for Box 3 income.

I believe it should have been in Box 3 and previous years it was. As this is my first year I have nothing to base it off of. Regardless, they checked Box 7 on my 1099 for some reason.... Its not dramatic.

kbl2017
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Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by kbl2017 »

I haven't seen my form yet - hasn't shown up yet - but everyone is say theirs was in box 7 this year - which is why we're worried.

CSMajor

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by CSMajor »

kbl2017 wrote:I haven't seen my form yet - hasn't shown up yet - but everyone is say theirs was in box 7 this year - which is why we're worried.
Regardless it's other income -.. Other income can be marked in box 7 or box 3. Just make sure you label the attached 1099 correctly when submitting everything.

argentum2f
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Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by argentum2f »

This was the fully reply I got from ASEE:
Hello,

Thank you for contacting us.

ASEE made the decision to place all fellowship stipend payments in box 7 based on IRS instructions on identifying the payee relationship, the preparation of the 1099 MISC forms and reporting of various income types, as well as the IRS regulations of handling payments for scholarships, fellowships and other grants. There will be no further advice given in this manner. ASEE cannot provide tax advice so we urge you to seek advice from a tax professional.

Jessalyn

Jessalyn Vermillion, CPA
Controller
American Society for Engineering Education
Inspiring Innovation. Advancing Research. Enhancing Education.
http://www.asee.org

1099income

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by 1099income »

I was told if it's reported on a 1099, it's income no matter what. :/

kbl2017
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Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by kbl2017 »

1099income wrote:I was told if it's reported on a 1099, it's income no matter what. :/
It's always income. You'll pay federal and state taxes - but it isn't self employed income.

Box3Not7

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by Box3Not7 »

I filed with Turbotax and it being listed in Box 7 made no difference for me. The form still allows Box 7 income to be marked as "Other income" and it was actually easier this year as Turbotax categorizes it as this automatically if you tell it this money was not in exchange for employment or a service (which SMART makes clear in the handbook). In the past, when it was Box 3, you had to manually mark the income as Other Income in Turbotax by opening the forms.

Filing with the income in Box 7 as Other Income resulted in no more taxes than it has in the past. It was about $4000 for me.

Guest

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by Guest »

I hadn't received my forms last year, by the way. For the last tax period, I tried to file them from the templates I found here, for w-2 form https://fillable-form-w2.pdffiller.com/ and else. But yet, it was rejected for some reason

LostinCyberspace

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by LostinCyberspace »

Since the stipend is not SE income, do you guys pay quarterly taxes on it, or have you just sent the IRS the money at the end of the tax season?

AnotherGuest

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by AnotherGuest »

LostinCyberspace wrote:Since the stipend is not SE income, do you guys pay quarterly taxes on it, or have you just sent the IRS the money at the end of the tax season?
You must pay quarterly taxes on it, unless it's for your first award year (because only the fall is included there). You will get charged interest by the IRS for not paying quarterly.

LostinCyberspace

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by LostinCyberspace »

AnotherGuest wrote:
LostinCyberspace wrote:Since the stipend is not SE income, do you guys pay quarterly taxes on it, or have you just sent the IRS the money at the end of the tax season?
You must pay quarterly taxes on it, unless it's for your first award year (because only the fall is included there). You will get charged interest by the IRS for not paying quarterly.
Okay, I was starting to worry because I only recently found out about quarterly taxes. So what happens during the first award year? Obviously, I have to pay taxes on the stipend so far, but when were you required to pay them?

Confused

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by Confused »

Also, how does one pay taxes every quarter?

taxman

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by taxman »

Confused wrote:Also, how does one pay taxes every quarter?
https://www.irs.gov/businesses/small-bu ... ated-taxes

All the info you need, courtesy the IRS.

AnotherGuest

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by AnotherGuest »

LostinCyberspace wrote:
AnotherGuest wrote:
LostinCyberspace wrote:Since the stipend is not SE income, do you guys pay quarterly taxes on it, or have you just sent the IRS the money at the end of the tax season?
You must pay quarterly taxes on it, unless it's for your first award year (because only the fall is included there). You will get charged interest by the IRS for not paying quarterly.
Okay, I was starting to worry because I only recently found out about quarterly taxes. So what happens during the first award year? Obviously, I have to pay taxes on the stipend so far, but when were you required to pay them?
For the first year, you fill out your tax forms and report the fall semester stipends as appropriate. You will pay taxes on it when you submit that form. Along with that, fill out the estimated tax form to get your quarterly payment estimates. Track as you pay each quarter (I did it online each quarter through the IRS website) so you can report these payments the next time you file your tax returns.

LostinCyberspace

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by LostinCyberspace »

Was/is the Aug-Dec payment due in January or April?

2zcreek

Re: Official IRS direction on Fellowship Taxes (NOT SE incom

Post by 2zcreek »

Last year 2017, my 1099-Misc was all in box 7, but this year it's in box 3.

jkatty

Re: Official IRS direction on Fellowship Taxes (NOT SE income)

Post by jkatty »

In order to avoid all misunderstandings I'd suggest to look in some of internet forms what is correct. Hope, that it'll help to solve all questions

Code: Select all

https://pdfliner.com/form_1099_misc
:)

talana

Re: Official IRS direction on Fellowship Taxes (NOT SE income)

Post by talana »

In order to avoid all misunderstandings I'd suggest to look in some of internet forms what is correct. Hope, that it'll help to solve all questions https://pdfliner.com/form_1099_misc :)

human234895
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Re: Official IRS direction on Fellowship Taxes (NOT SE income)

Post by human234895 »

It is non-compensatory "other income." Self-employment tax does not apply. You are not self-employed and you are not paid/compensated in proportion to or in exchange for any services performed. The income is most comparable to a stipend paid NOT in exchange for TA/RA services. I personally use Credit Karma Tax because it's free. The correct option is found in the menu for 1099-MISC on a screen where you're asked to describe the source of your income. When you select Other Income, a warning will pop up indicating that self-employment tax will not be applied. I imagine all major tax services should have a comparable option.

I believe the IRS blurb you pulled saying scholarships should not be filed on a 1099-MISC is referring to direct payout scholarships/grants which are usually reported in another section if not used entirely for their declared purpose. For example, if you win a $1000 scholarship from your school, but your parents, another scholarship/funder, etc. have already paid for all your education expenses, the excess funds would be reported in the appropriate section and be counted as taxable income. But NOT in 1099-MISC.

At the end of the day, SMART has filed a 1099 to the IRS, so it's a 1099. You just need to make sure you file your taxes correctly and don't pay self-employment income.

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