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Weird Tax Situations for Fellowship and Training Grant Recipients

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One of the most puzzling tax scenarios that is common in academia but almost unheard of outside of it is fellowship or training grant funding because it neither a wage nor self-employment income. Fellowships and training grants, which I call “awarded income” frequently pay the stipends and salaries of grad students and postdocs, but also apply to some other kinds of trainees that aren’t considered students or called postdocs. This post explains the weird tax situations for fellowship recipients and how to resolve them. I’ll clarify right up front that you do need to incorporate your fellowship income into the gross income you report on your tax return, and you almost certainly will end up paying tax on it (unless your total income is very low or you have lots of other deductions/credits).

weird tax fellowship

Further reading/viewing:

I have to define my terms up front here because “fellowship” is used variously inside and outside of academic research, and these weird tax situations don’t always apply. What I’m talking about is when your income from your academic/research role is not reported on a Form W-2 (and you’re not self-employed).

Often, though not always, winning an external or internal fellowship generates this kind of income. The NSF GRFP and DoD NDSEG are probably the most well-known examples of this type of income at the graduate level for STEM fields. Basically, you’re being paid because you won an award, not because you are directly trading work or time for money. This kind of income can come from training grants and other kinds of grants as well as fellowships, and in those cases you might or might not be labeled a fellow.

If your income is reported on a Form W-2, whether it’s called a fellowship or not, this post doesn’t apply to you!

Personally, over my time in/near academia, I received awarded income on five occasions:

  • I was postbaccalaureate fellow at the NIH for a year between undergrad and grad school, and my income was reported on a 1099-G.
  • I was on a training grant in my first year of grad school, and my income was reported on a 1099-MISC in Box 3.
  • I won an internal fellowship for my second year of grad school, and my income was reported on a 1099-MISC in Box 3.
  • I was paid from my advisor’s discretionary funds in my sixth year of grad school, and my income was reported on a 1099-MISC in Box 3.
  • I was a Christine Mirzayan Science and Technology Policy Fellow at the National Academy of Engineering, and my income was reported on a 1099-MISC in Box 3.

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Receiving Unusual Tax Forms

The way to definitively tell that you’re receiving awarded income is that you don’t receive a Form W-2 at tax time for your income, which was likely paid similarly to a regular salary or perhaps in a lump sum per term. Instead, you might see your income reported on some other strange tax form:

  • Form 1098-T
  • Form 1099-MISC

There are other possible mechanism for this reporting; these are the two most commonly used within universities.

Neither of these forms was designed for reporting awarded income; neither does it very well, but they do get the job done if you know what you’re looking for.

Form 1098-T

Form 1098-T, which is issued to some students depending on your university’s policies, is sort of a clearinghouse form for the sum of your fellowships/scholarships/grants received (in Box 5) and also the sum of the qualified tuition and related expenses that were paid (Box 1) to your student account. Your fellowship income might be lumped in with your scholarships in Box 5, which makes them a little hard to parse, or Box 5 might only include your scholarships (see next section if so).

The good thing about Form 1098-T if it includes your fellowship income is that it does put front and center two of the important numbers you’ll need to work with when you prepare your tax return, the sum of your awarded (fellowship, scholarship, and grant) income (Box 5) and a subset of your Qualified Education Expenses (Box 1). You don’t really need to know what your fellowship income was independent of your additional scholarship/grant income See Weird Tax Situations for Fully Funded Grad Students for more details about working with Form 1098-T.

Form 1099-MISC

Form 1099-MISC is a super confusing form to receive for fellowship income.

First, any non-academic who hears/sees that you have income reported on a 1099-MISC is going to think you’re self-employed. Self-employment/contractor income is the most common usage for the 1099-MISC, but that income is reported in Box 7. Fellowship income usually shows up in Box 3, “Other income,” although occasionally it does show up in Box 7. If you are a grad student or postdoc, you are not self-employed; do not pay self-employment tax!

Further reading: Grad Student Tax Lie #2: You Received a 1099-MISC; You Are Self-Employed

Second, the instructions for the 1099-MISC tell you to (“generally”) report your Box 3 “Other income” in the “Other income” line on your Form 1040 Schedule 1 Line 21. You can do it that way and your tax calculation will turn out correctly in a lot of situations, but it’s more correct to report the income explicitly as fellowship/scholarship income. 1099-MISC Box 7 income that is definitely fellowship income should be reported as fellowship instead of as self-employment. In both of these cases, it’s less confusing for the IRS and will possibly enable you to take more educational tax breaks.

Further reading:

Receiving No Tax Forms

Going along with the theme of not receiving a Form W-2 at tax time, you might very well not receive any tax form at all! It’s very common for there to be zero communication between the organization that pays the fellowship and the fellowship recipient. Other times, the fellow might receive what I call a “courtesy letter,” which is just a short, informal letter stating the amount of fellowship money paid.

Further reading: What Is a Courtesy Letter?

Fellows who don’t receive tax forms or whose universities/institutions don’t communicate with them at all about their personal taxes may feel completely adrift. They have no idea where to even start with preparing their tax returns. Many pay no taxes at all (if you know someone like that, send them this article!) since it takes a certain level of awareness of your tax responsibility to even wonder if you need to pay income tax. Even those who suspect they need to report and pay tax on their fellowship income might be daunted by the task of figuring out from scratch exactly how to do that.

Further listening: Do I Owe Income Tax on My Fellowship?

But it’s really a simple process to carry out if you know what to do! You should be able to find the amount of fellowship income you were paid for the whole year from your bank records. If you’re not a student, you just straight report that number in Form 1040 Line 1 with “SCH” written next to it. If you are a student, you have to work with your other scholarships and qualified education expenses a bit before reporting a number for your awarded income; see Weird Tax Situations for Fully Funded Grad Students for more details on that.

Further reading: Where to Report Your PhD Trainee Income on Your Tax Return

Quarterly Estimated Tax

In my observation, most fellowship recipients have the responsibility of paying quarterly estimated tax, and many, many, many neglect to do so. If you need one level of awareness to even understand you’re supposed to pay tax on your fellowship income, you need an even higher level of awareness before you follow through on paying quarterly estimated tax. In fact, if the organization providing you the fellowship didn’t mention this, it’s not a water cooler topic around your department, and/or you’ve never been self-employed, you almost certainly wouldn’t know to do it.

The basic principle here is that the IRS expects to receive tax payments throughout the year, not just in April when your tax return is due. If you owe enough additional tax at the end of the year (and don’t qualify for an exception), the IRS is going to demand not only your tax payment but late fees and interest as well.

The main system for sending tax in to the IRS is tax withholding on a normal paycheck. If you don’t do that or your withholding isn’t sufficient, you’re supposed to file quarterly estimated tax. Basically, you send in a payment (no forms need to be filed) to the IRS four times per year to make sure you don’t have too much extra tax due when you file your yearly tax return. You should work through the estimated tax worksheet in Form 1040-ES to figure out if you are required to pay quarterly estimated tax and in what amount; you can also find the instructions for filing it in that form.

Further reading: The Complete Guide to Quarterly Estimated Tax for Fellowship Recipients

Taxable Compensation and Earned Income Tax Breaks

Some of the tax breaks the IRS offers are contingent on the type of income you have, and fellowship income (not reported on From W-2) does not necessarily qualify.

Individual Retirement Arrangement

To contribute to an Individual Retirement Arrangement (IRA), you (or your spouse) must have “taxable compensation.”

Through 2019, the definition of “taxable compensation” did not include fellowship and training grant income not reported on Form W-2. However, starting in 2020, the definition of “taxable compensation” changed for graduate students and postdocs to include fellowship and training grant income even if not reported on From W-2.

Therefore, all types of graduate student and postdoc taxable income, whether reported on a Form W-2 or not, is eligible to be contributed to an IRA starting in 2020.

Further reading:

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) or Earned Income Credit (EIC) is a credit extended to low-income individuals and families. If your household income is quite low and/or you have one or more children, you might be able to receive the credit. As the name implies, you need “earned income” to qualify for the EITC. Unfortunately, fellowship/scholarship income is not considered “earned income” (Publication 596 p. 18). Puzzlingly, having zero earned income disqualifies you from the credit, but having too much non-earned income also disqualifies you from the credit. The definition of earned income also plays into the calculations for the Child Tax Credit and Additional Child Tax Credit.

Further reading: Grad Student Tax Lie #8: You Can Claim the Earned Income Tax Credit

Dependent Status

When you are trying to determine if you should file a tax return as an independent adult vs. a dependent of your parents, it is more difficult to qualify as independent with fellowship income rather than an equal amount of W-2 income. (This only applies to students under age 24.) While education expenses count as part of the amount of money that goes toward your “support,” scholarships and fellowships that you won do not count as you providing your own support.

Kiddie Tax

Fellowship income counts as unearned income for the purposes of being subject to the Kiddie Tax. If you are under the age of 24 on December 31 and a student, your “unearned” income exceeding $2,200 may be subject to a higher tax rate than the ordinary rate.

Further reading: Fellowship Income Can Trigger the Kiddie Tax

What other weird tax situations have you encountered due to your fellowship or training grant income?

Using Data to Improve the Postdoc Experience (Including Salary and Benefits)

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In this episode, Emily interview Dr. Gary McDowell, the executive director of Future of Research. Future of Research is an advocacy organization that uses data to empower early-career researchers. Gary outlines the ongoing work at Future of Research before diving into the details of their recently published study on postdoc salaries. Emily and Gary discuss the complexities around categorizing and counting postdocs as well as the interesting results from the data Future of Research acquired by Freedom of Information Act requests. Current postdocs can contribute to this ongoing project by submitting their salary and benefits data to the Postdoc Salaries database.

 

Links mentioned in episode

postdoc salaries

0:00 Introduction

1:07 Please Introduce Yourself

Dr. Gary McDowell is from Northern Ireland and Scotland. All of his undergraduate and postgraduate education was completed in the United Kingdom. He moved to the United States to become postdoc. First, he worked at Boston Children’s Hospital, then he worked at Tufts University in the Boston area. As a postdoc in the United States, Gary became interested in the scientific system itself, such as setting scientists up for success and producing scientists, not just science. He experienced the frustration that many people feel with the scientific system and its hyper competition.

Now Gary is the executive director of the nonprofit Future of Research. Their mission is to empower early career researchers with evidence to help them change the research system and the enterprise they experience.

3:00 Can you give us an overview of Future of Research and the organization’s work?

Gary is the only staff member of Future of Research. The board of is comprised of twenty early career researchers. The organization originated with a conference to bring early career researchers together to discuss ways to reduce hyper-competition in biomedicine. They held conferences around the country and realized the need for a group that has these conversations. The nonprofit provides data and evidence to early career researchers to help them make better choices and to educate the rest of scientific community of the realities our generation is currently experiencing. Their work is done by the board and volunteers.

Future of Research has worked on two major projects which came out of local meetings. The project “Who’s on board?” aims to get more early career researchers into leadership positions, starting with scientific societies. Through this project, Future of Research seeks to generate a network of future leaders for scientific organizations to tap into. They are working on a project to address mentoring, because it is one of the biggest concerns of early career researchers. Junior faculty often ask, “How do I find out more about how to mentor and manage people?” Junior faculty are expected to be mentors, but don’t know how to. Future of Research will host a summit in Chicago to bring together people who work in this space and who research mentoring. They will discuss what grassroots action they can take to make sure institutions are putting mentoring at the center of their interests.

Future of Research has been responsive to needs that arise. They are beginning a project to examine peer review and address this phenomenon of grad students and postdocs essentially ghostwriting a peer review report that is then submitted to a journal under someone else’s name. This is a problem of appropriate scholarly recognition, but at the same time the academic community hears there are not enough reviewers. Journals are crying out for more reviewers, but there is lack of transparency about who’s doing reviews, creating barriers to journals having names of potential reviewers. Surveys suggest that principle investigators are not trained in peer review, their practices come from assumptions, and there is generally lack of clarity of expectations in the peer review process.

Future of Research has just finished a postdoc salary project. It started when they formed the nonprofit. At the time, there was a change to federal labor law being proposed. The change was going to affect postdocs by raising their salaries, or by causing institutions to have postdocs clocking in and out and tracking time. Future of Research watched the push to raise postdoc salaries, and started following what institutions would do in response. They had the question about what are the actual salaries that people in postdoc positions have?

8:34 What is your recent paper and where can people find it?

The title of their paper is “Assessing the landscape of U.S. postdoctoral salaries.” It’s open access in the Studies in Graduate and Postdoctoral Education, Emerald Insight Publishing Groups.

9:07 What is a postdoc?

According to Gary, the PhD is when the trainee is learning how to do science, how to carry out research, how to do experiments, and analyze,. The PhD is for learning the nuts and bolts of being a scientist. The postdoc is intermediate, after the PhD and before the professor position. Gary’s opinion is that a postdoc should be considered as a period when you should be thinking about your own research goals and how to take those foward. Postdocs should be learning under the mentorship or apprenticeship of an investigator. Postdocs should be learning how to manage a group, mentor people, manage budgets, write grants, and lead a team.

However, Gary says that the postdoc is more likely a period of further research. Many people change field and get experience in another research group. Postdocs are often trying to get a certain number of published papers. Postdocs are trying to demonstrate they can succeed in a different lab and accrue credentials to get a faculty position to start as a professor.

Emily adds that there are eleven different common titles under which postdocs can be hired. There is a discrepancy between how employers see postdocs and how postdocs see themselves. What level of awareness do universities have around their own postdocs?

11:55 How was the idea for a project to assess postdoc salaries formed? What question were you asking?

When the team at Future of Research was looking at policies that were being updated in response to labor law, they realized that these policies at an institution don’t tell us necessarily what people are getting paid. Though the institution has a policy about postdoc salaries, actually paying postdocs that amount requires adherence to policy and someone following up to enforce policy. The team saw a pre-print paper by Rescuing Biomedical Research, another nonprofit, which looked at National Science Foundation data on number of postdocs and concluded that the number of postdocs in decline. They questioned whether there is truly a decline, or instead a bubble of people staying in postdoc positions for longer. These questions led them to start the project to collect data on postdoc salaries.

The team at Future of Research found that institutions are doing a terrible job of reporting year to year how many postdocs they had. While institutions were receptive to policy changes, if the institutions don’t know who the postdocs are to begin with, will people fall through the cracks? Will the policies actually be reflected in reality? The institution could recommend salary, but never follow up.

Institutions are also in a constant argument over whether postdocs are employees or trainees. Unfortunately, it seems postdocs are employees when it suits, such as when the institution needs to keep postdocs out of things they need to do for students, but postdocs are trainees in terms of lower salaries and receiving no benefits.

14:18 What position counts as an employee or not an employee?

Gary explains that whether a position is designated as an “employee” is complicated by where the money comes from. Postdocs may be “staff” on a grant, or postdocs may be on fellowships of various kinds. When postdocs are on fellowships or paid directly, they are usually referred to as trainees, typically lose benefits, and the institution says they are no longer an employee. The U.S. Department of Labor created a specification about who is an employee, specifying that it’s not who pays you, it’s the nature of the work. The Department of Labor made this specification because some institutions tried to designate postdocs as fellows to get out of the new labor law. The Department of Labor explicitly sent this message to the National Institutes of Health, stipulating that the NIH had to raise fellowship stipend under the new law.

17:08 What did you do for the postdoc salaries project?

The team from Future of Research wanted to analyze postdoc salaries, but they learned that this information was not easy to find. They carried out Freedom of Information requests at public institutions. They contacted the Freedom of Information or Public Records offices at public institutions, which were legally required to give out data like this. They asked for the position title and salary of everyone who was a postdoc, on date of December 1, 2016 when the new labor law was due to come into effect and changes were likely to happen. This method forces the institution to provide information, and this method served as an internal metric of whether universities know what postdocs are. Certain institutions didn’t know what a postdoc was, and asked Future of Research to explain what a postdoc is. Future of Research cross checked the information they received from Freedom of Information requests with the National Science Foundation data on postdoc numbers.

20:05 What was your analysis of the data from public institutions?

Future of Research had a data scientist on the team, who analyzed the distribution of salaries. They brought out patterns by geographic region, by gender, and by title. They examined what variables were affecting the salaries. Their aim was to assess the landscape and figure out what salary distribution looked like. This could set the bar to work from for efforts going forward.

21:07 What were the broad conclusions of the postdoc salaries project? Was there anything surprising to you?

Gary says they got broad distributions of postdoc salaries. Nature published a write-up that emphasized that postdoc salaries vary wildly by institution. Most people received between $40,000 and $49,999 annual pay. They found that 22% of all their data was within a $25 range around the new National Institute of Health minimum stipend, which was very close to the proposed salary threshold is under the federal labor law. Gary shares that when Future of Research considers the levers they need to pull to raise postdoc salaries, it is a very useful finding that the median salary of all postdocs across the US, regardless of field, was pegged to minimum NIH National Research Service Award stipend amount. The most effective policy lever for raising postdoc salaries in the U.S. is to get NIH to raise the NRSA award stipends.

Emily emphasizes that so many universities go off the NIH minimum salaries, even though it’s just a recommendation, and it’s just a minimum. She points out that this minimum doesn’t take into account different cost of living. Is this the minimum for Bethesda, Maryland, where the NIH is located? Institutions go off this as if it is absolute truth. Gary brings up that in December 2018, NIH raised minimum salary. Now the minimum is $50,000, this amount has been recommended for quite some time. Gary and Jessica Polka, president of Future of Research, are on the National Academies study for the Next Generation Researchers Initiative. They will be releasing recommendations informed by this data.

Gary was surprised by how many salaries were in the $50,000 range. They broke down the distribution by field for a large subset and found no real field dependence for the salaries. People would expect the humanities to be lower, but the humanities were not lower. Gary was surprised by how often biomedical engineering salaries were in the lower end of the distribution. Gary wonders who negotiates, and if there’s a disparity in who’s negotiating. He mentions that talking about money in academia is stigmatized.

Emily created the website PhD stipends with her husband. Now it has over 4000 entries in it. It is a great place to go for prospective graduate students. She has thought there should be the same resource for postdocs. They have started postdocsalaries.com for people to self-report their salaries. Future of Research obtained information from public institutions, but they are completely missing private institutions. Self reporting also provides a check on whether what the institution reports matches what postdocs report. Postdocsalaries.com is a useful self reporting tool, that helps other people compare salaries and gives them the opportunity to comment on issues.

Gary discusses that when he gives a talk at institution, he loves to bring up money. He wants to break the stigma that ‘we’re not supposed to talk about this’ and tell people that this should be one of the questions that you ask your prospective PI. Gary says how that question is answered will tell you a lot about the PI as a person. You should look for someone who responds “I would love to pay you more, we can look into fellowships or I can find opportunities to pay you extra,” and steer clear of potential advisors who say “This isn’t about the money.” This is part of gathering information for your decision.

37:08 What are some action steps that postdocs can take today to improve their salaries, benefits, or working conditions?

Gary says always having data at hand is useful for individuals and groups to advocate. With data, you can approach an institution with the salaries that people are getting in your field, and point out that this is what the policy says so this is the expectation. This is action you can take on the personal level.

When Future of Research compared institutions publicly, there were administrators who could now use the data to say that the institution is being compared to everyone else, if they want to be competitive for postdocs they need to raise postdoc salaries. For groups looking to push for change in an institution, there are a number of lines of evidence. Gary says that comparing with peer institutions is useful. The most recent recommendations are that postdoc salaries should be at least $50,000 then adjusted for cost of living, then for your years of experience.

Listeners should go to postdocsalaries.com to get involved and learn more.

40:56 Conclusion

What to Do with Your Higher Take-Home Pay

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Whatever you might think of the Republican tax bill from last fall, it has now been passed into law and has already started to affect your income taxes for 2018. In many cases, your tax burden as a graduate student or postdoc will decrease for this year compared to last year, which means you’ll have more money in your pocket starting with your January or February paycheck.

higher take home pay

Will Your Take-Home Pay Increase?

A few weeks ago, I calculated what the tax burden would be for single or married people with no dependents with the income ranges that are most common for graduate students and postdocs ($15,000/year to $110,000/year). I found that across those income ranges, the tax burden decreased by 20-35%. Families with children under the age of 17 would see an even further decrease due to the larger Child Tax Credit.

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To perform these calculations, I assumed that you will take the standard deduction on both your 2017 and 2018 taxes. If that assumption is true (and your income is in the above range), you should see a decrease in your tax burden.

The taxpayers who may see an increase in tax due under the new law are those who currently itemize their deductions, such as households who have in the past deducted more than $10,000 in property tax and state and local taxes together. Another group that may see a higher tax liability under the bill (depending on the rest of their situation) is parents of dependent children aged 17 and older; the exemptions they used to take have been eliminated, and the expanded child tax credit is only for children up to age 16.

Further Reading:

However, I think my assumptions are valid or at least reasonably accurate for the vast majority of graduate students and postdocs, who tend to be younger with lower incomes/expenditures. It’s safe to say that most graduate students and postdocs will see a higher take-home pay in spring 2018 than they did in fall 2017; effectively, you will see a ‘raise.’

What to Do with Your Income Increase

I have no shortage of ideas of actions you can take with your increased take-home pay, whether it’s $14.50/month (for a single person with no dependents earning $20,000/year) or $109/month (for a married couple with no dependents earning $70,000/year). Chances are, last month you didn’t have a lot of money lying around begging to be put to use, and starting pretty soon you will have some non-spoken-for money to work with.

Don’t let this money just disappear into the ether! Allocate it to something specific. If possible, I recommend you set up an automated transfer from your checking account to wherever the money needs to go so that you relieve your willpower/memory of the responsibility of making the transfer manually.

Financially Responsible Action Items

Add to Your Emergency Fund

If you don’t yet have a dedicated emergency fund with a balance of $1,000 (or a higher target, e.g., three months of expenses), use the extra money to beef up your emergency fund! When (not if!) life throws you a curveball, your emergency fund is what stands between you and serious financial consequences.

Further Reading:

Start Investing/Add to Your Investments

YES it is possible and worthwhile to start investing with just a few dollars per month and it’s also amazing to even incrementally increase your existing regular savings rate!

Using this compound interest calculator to estimate, adding just $25/month to your investments for one year, at an 8% rate of return in 50 years that $300 will become over $13,000! If you kept up that higher savings rate for all 50 years, it becomes over $172,000! Sure, that’s not all the saving/investing you will need to do for your retirement, but even a small regular savings rate helps a lot.

Further reading:

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Pay Down Debt

Similar to the investing example, a few extra dollars per month thrown at your existing debt can accelerate your progress to debt freedom.

If you currently had $500 in outstanding credit card debt and were making the minimum payment of $25/month, it would take you 23 months to pay off the card. But if you instead paid $50/month, you would knock out that debt in 11 months!

While you are not required to make payments on deferred student loans, if they are unsubsidized they are currently accruing interest. For example, if you had $10,000 of deferred unsubsidized loans at 6.8% interest and five years until graduation (and the end of the deferment), putting $25/month toward your loans would decrease the $14,036 you would have owed at the end of grad school to $12,255 (the $1,500 you paid decreased your debt by $1,781).

Further reading:

Invest in Your Career

Instead of using your money to increase your financial security or net worth directly, you could double down on your PhD training and invest in your career. Not many universities provide adequate career exploration and training for PhD students and postdocs, especially for “alternative careers.” You could use your increased cash flow to save up to attend a key conference in your field (if you’ve already used the funding available to you) or for a career path you’d like to get into. You could join a membership site like Beyond the Professoriate to help you transition out of grad school/your postdoc/your current job and into a fulfilling job. You could take a one-time seminar on negotiating a job offer; think of the ROI on that training!

Not-Financially-Focused-But-Still-Good Ideas

There are plenty of good ideas of what to do with money that will have a positive impact on your well-being rather than your bottom line specifically.

Treat Yo Self

Set aside a bit of time to consider what would give you the most ‘bang for your buck’ with this extra cash flow in terms of increasing your satisfaction in your life. You could use it on a monthly basis to take a fancy exercise class, have a special date night, enroll in a new subscription service, or care for a small pet. You could save up over the course of a few months or the year and take an extra flight to see loved ones, purchase new electronics (my husband is currently eyeing an ergonomic mechanical keyboard!), or update your wardrobe. What will mean the most to you is obviously quite personal, but whatever you choose, the key thing to do is to earmark the extra money for your choice so that it doesn’t get swept up in the rest of your expenses.

Give

At any point in 2017 or earlier, did you come across a non-profit or certain cause that you had the impulse to donate to, but you just didn’t have the available funds? This is your opportunity! You can now set up a recurring donation to a group whose work is meaningful to you. Non-profits really appreciate steady contributions that they can plan on. Alternatively, you could set aside a dedicated savings account with a monthly automatic savings rate that is earmarked for giving. My husband and I did this in graduate school for one-off donations that we would make a few times a year, and it was a wonderful feeling to be able to say “yes” when an opportunity presented itself without having to scramble or make hasty calculations.

Don’t let this opportunity to act intentionally with your increased cash flow pass you by! It might be quite a while before you get another increase in your take-home pay so make the most of it.

New Fellow? Pay Your Quarterly Estimated Tax for the First Time This Week!

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Did you start receiving a fellowship this academic year as a graduate student or postdoc? First, congratulations! Second, I must clear up a pernicious misconception about fellowships in the US: you do owe federal income tax (and probably state, too) on your fellowship income. If income tax is not being withheld from your stipend/salary (and the majority of universities do not offer withholding on this type of income), you may be responsible for making quarterly estimated tax payments throughout the year. The next payment is due tomorrow, January 16, 2018! This post will guide you through how to determine whether you owe quarterly estimated tax and how to pay it if so.

Do You Receive Your Gross Income?

The IRS expects to receive income tax payments throughout the year, not just each April. Employees almost always have income tax withheld from their paychecks; instead of receiving their gross (full) income, their employer sends approximately the amount of tax the employee owes from each paycheck to the IRS and the employee receives the rest (net income).

Fellowship recipients (when the term is used conventionally; perhaps not universally) have non-compensatory pay and are not considered employees of their universities. Most universities do not offer income tax withholding on fellowship stipends/salaries. Taxpayers who do not have income tax withheld from their salaries (or who have too little withheld compared to the amount of tax they owe) are sometimes responsible for manually sending money to the IRS. This is called making quarterly estimated tax payments.

If you are a fellowship recipient (e.g., the NSF GRFP), your first step is to confirm that you are in fact not an employee, and your second step is to check whether you are receiving your gross or net income.

Step 1: The easiest way to determine if you are an employee (or rather, confirm that you are not) is to check whether you receive a W-2 for your fellowship income. (If you had an assistantship in this calendar year, you will receive a W-2 for that position, so be sure to check specifically about your fellowship income.) However, if you just started your fellowship in the 2017-2018 academic year, you aren’t due to receive (or not receive) your tax forms until the end of January 2018, and the estimated tax payment is due in mid-January. Your next best option is to inquire into what tax form you will receive for your fellowship stipend/salary. Non-compensatory pay will appear on a 1098-T, 1099-MISC, or courtesy letter or will not be reported in any way. Compensatory pay (indicating that you are an employee) will appear on a W-2. You should try asking your departmental administrative assistant, university fellowship coordinator, Bursar’s Cashier’s office, and/or payroll office. You will most likely be told that they “cannot give tax advice,” but confirming what type of tax form your income generates is not advice.

Step 2: Having confirmed that you are not an employee (if you are, you don’t need this post!), double-check the stipend/salary amount that hits your bank account. If you multiply it by the number of pay periods over which you will receive it, is it equal to the gross fellowship stipend/salary you were told you would receive or is it less? If it is less, did you at any point file a W-4 (e.g., when you had an assistantship)? You may be one of the few students/postdocs who has income tax withheld from a fellowship stipend/salary. As stated earlier, a small minority of universities do offer withholding on fellowship income, and they should use a W-4 to determine the amount of withholding.

If you are not an employee and are not having income tax withheld from your fellowship stipend/salary, you may need to make quarterly estimated tax payments.

Are You Responsible for Paying Quarterly Estimated Tax?

The IRS explains who is responsible for filing quarterly estimated tax on Form 1040-ES p. 1.

Right off the bat, you are not required to pay quarterly estimated tax if in the previous tax year your total income was zero or you did not have to file a tax return (and your return covered all 12 months). For example, if you were a student for all of 2016 and either didn’t have an income or your income was so low that you didn’t have to file a tax return, you aren’t required to make quarterly estimated tax payments.

If that first provision doesn’t apply to you, the IRS has a helpful flow chart on Publication 505 p. 24.

Publication 505 Figure 2-A

At this point, you’re going to have to do a few calculations to determine what amount of additional tax you owe for the year (additional to any withholding you already had). You simply need to fill out the worksheet on Form 1040-ES p. 8 for your household. It looks sort of involved but if you have a simple financial life you won’t actually need to put very many entries into the worksheet. You will need at your fingertips your 2016 tax return (or at least the total amount of tax you paid), your gross income for 2017, the amount of income tax you had withheld in 2017 (if any) and an educated guess as to your 2017 deductions and credits (your 2016 return will be helpful for this).

Once you calculate the amount of tax you owe in total for 2017 (Form 1040-ES line 13c), you can determine whether you are responsible for paying quarterly estimated tax.

First, look up the total amount of tax you paid in 2016. Second, take your total tax due for 2017 and multiply it by 90%. The smaller of these two numbers is the amount of tax you need to pay throughout 2017 to avoid a penalty (Form 1040-ES Line 14c).

Subtract the amount of income tax you had withheld in 2017 (Form 1040-ES Line 15) from the amount you need to pay to avoid a penalty. If the result (Form 1040-ES Line 16) is less than $1,000, you are not required to make a quarterly estimated tax payment. If the result is greater than $1,000, you are required to make a payment.

Please note that just because you are not required to make quarterly estimated tax payments does not mean you will avoid paying tax the whole year, only that the additional tax due does not have to be paid until you file your 2017 tax return this spring. Now that Form 1040-ES has given you some warning, use the next few months to prepare to make that lump sum income tax payment.

How to Pay Quarterly Estimated Tax

If you are required to make a quarterly estimated tax payment, the calculation is pretty simple since this is the last payment due for 2017! You should make a payment for all the additional tax due that you calculated you owe (Form 1040-ES Line 16a). If your calculations were exact, when you file your 2017 tax return in the spring, you won’t receive a refund or owe any additional tax. More likely, filling out your full tax return will bring to light a few adjustments in your calculations, so you may end up receiving a small refund or paying a small amount of additional tax.

The easiest way to make your quarterly estimated tax payment is online at www.IRS.gov/payments (find all your payment options on Form 1040-ES p. 3-4 or Publication 505 p. 32-33).

If you were unaware that you had any income tax liability on your fellowship income and are unprepared to pay what you owe by January 16, 2018, don’t avoid the issue! Give the IRS a call and they may be able to work with you to minimize the penalties you owe (though not the interest).

Calculating your quarterly estimated tax is not very difficult; the most challenging aspect is knowing that you’re supposed to do it! If you are a new fellow and this is your first time making a quarterly estimated tax payment, rest assured that it will be easier going forward. You first quarterly estimated tax payment for 2018 is due on April 17, 2018. You’ll want to freshly fill out the 2018 1040-ES once it’s available, but it should be similar to the form you just worked through.

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How to Put Your New Postdoc Salary in Context

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After a long, arduous journey through graduate school, you’ve successfully defended your PhD and are about to take the next step in your research career: a postdoc. One of the best perks of transitioning from being a graduate student to a postdoc is the pay increase. While postdocs aren’t exactly rolling in dough, they are usually paid significantly better than graduate students, and after 5+ years of zero to tiny raises, it’s gratifying to finally receive a higher salary.

However, before you buy that new car or put an offer on a house, take some time to put your new postdoc salary offer in context. There are a few subtle changes common to the grad student-postdoc transition that will decrease your take-home pay and/or discretionary income.

(This post is specific to the US.)

Employee or Fellow?

The very first question to clarify is what exactly your employment status will be with respect to your university/institute. Just like in graduate school, there are two broad ways you can be paid: compensatory or non-compensatory. In academic-speak: Are you an employee or a fellow?

If you see “fellow” in your title or offer letter, have heard “fellowship” from your advisor when discussing funding, or have won an outside individual fellowship, you are a fellow and not an employee of your university. As a fellow, you may receive no benefits from your university or only a few; you are almost certainly not going to receive all the benefits a full employee would. You should contact your university’s postdoc office or your departmental administrative assistant for a full explanation of your benefits.

If you aren’t labeled a “fellow” you are most likely an employee, but there may be multiple classes of employees at your university so it’s important to determine which one. (Postdocs may not be offered the same benefits as faculty, for example.) Once you know exactly your class of employee, you can read through material provided by Human Resources to determine your benefits, and direct any questions you have to Human Resources or the postdoc office.

When in doubt, ask if you will receive W-2 pay or not. W-2s are used for employee pay, while non-compensatory pay is not reported to the IRS or reported on a 1099-MISC.

Further viewing: Types of Grad Student Pay and Their Implications

Some of the common, though not universal, differences in benefits offered to employees though not fellows are: income tax withholding, 403(b) access, 403(b) match, subsidized health insurance premiums, health insurance premiums paid as a payroll deduction, Health Savings Account/Flexible Spending Account, group disability and/or life insurance access, and official paid time off.

Income and FICA Taxes

If you’re earning more as a postdoc, you’re also going to pay more in federal income tax (given no other changes in your personal life). Your effective tax rate will increase and possibly your marginal tax rate as well. So if your gross pay increases by $1,000 per month, for example, federal income tax may take a $120 or $220 (or somewhere in between) bite out of that increase.

The same broad story would be true for state taxes if you are not moving states, but many postdocs relocate states as well with their new positions. If you don’t want any surprises in your first paycheck, look up how your new state’s tax brackets and rates compare to your old state’s.

One of the biggest tax changes that occurs when going from a grad student to a postdoc is FICA tax (Social Security and Medicaid). As a graduate student, you did not pay FICA tax. Postdoc fellows will also not pay FICA tax (or self-employment tax) on their income as they do not technically receive “wages.” However, postdoc employees will begin to pay FICA tax. On the employee side, the Social Security tax is 6.2% and the Medicare tax is 1.45% on all of your income up to $128,400 (in 2018). If your new postdoc salary is $45,000 per year, for example, you will pay $3,442.50 in FICA tax. That can be a big shock for someone who wasn’t paying any tax in that category previously.

The best way to calculate your new take-home pay after all of these changes is to use a paycheck calculator, of which there are many. (However, due to the recency of the tax law changes, online paycheck calculators may not yet be updated for 2018. As of this writing, the IRS has not yet updated its withholding calculator.)

Further reading: Why Is My Take-Home Pay as a Postdoc Nearly the Same as When I Was a Grad Student?

Health Insurance

While your grad school and postdoc universities almost certainly offer you the option of buying group health insurance, who pays the premium and how might change.

As a graduate student, it is typical to have your health insurance premium paid partially or completely from funds that are not part of your stipend pay, so many graduate students don’t have to factor that cost into their take-home pay.

A postdoc employee will likely pay part or all of his insurance premium through a tax-free payroll deduction. A postdoc fellow’s insurance premium may be paid on her behalf, similar to a graduate student, or come completely from her salary.

This is an important benefit to check into prior to starting your postdoc position as you don’t want any lapse in coverage or to be surprised by the additional expense. The premium for a postdoc’s insurance may be much higher than a graduate student’s, depending on the risk pool each position is put in.

Student Loans

Another big change when you transition out of being a student is that your student loans, if you have any, are no longer eligible for in-school deferment. Beginning to pay off student loans can be a large monthly expense on a postdoc salary, depending on the total amount owed.

Contact your lender(s) to find the minimum payment due and the period over which you will repay your loans. Federal student loans have a standard repayment period of 10 years, but private student loans may take a shorter or longer period of time. Factor this minimum payment due into your planning for how to allocate your salary.

If you want to pay off your debt faster than the standard repayment period, which is an excellent idea for debt at a moderate or high interest rate, plan on paying more than the minimum amount due each month.

If you don’t think your postdoc salary can handle even the minimum payment on your student loans, you have two options to immediately consider.

1) With respect to your federal student loans, you may be eligible for one of the many repayment programs that lower your minimum payment due (even, potentially, to $0) by extending the repayment period and overall amount of money you will repay (income-based repayment, pay as you earn, etc.). Your eligibility for these programs depends on your household income. Carefully consider whether it is in your best interest to use one of these programs, even if you are eligible.

2) There are many lenders currently offering student loan refinancing at competitive interest rates. When you refinance, you are paying off your old loans and taking out new private loans, so make sure you would not be losing any benefits unique to student loans, such as the repayment programs for federal student loans. Be forewarned that these lenders only work with borrowers with excellent credit and low debt-to-income ratios. If you can significantly lower your interest rate, refinancing may be a positive step for your personal finances, both lowering your minimum payment due and reducing the total amount of money you will repay.

Cost of Living

With a change in university naturally comes a change in the local cost of living. As you well know, living expenses vary greatly from city to city. At the lower salary levels of a graduate student or postdoc, this can be a major concern.

There are two quick methods to estimate how the cost of living will change between your grad school city and your postdoc city.

CNN offers a cost of living comparison calculator. Plug in the two cities in question (or as close as you can get to them) and put in either your grad student salary or your postdoc salary. Your greater familiarity with the cost of living in your grad school city combined with this calculator will help you estimate how far your new salary will go in your new city.

MIT’s living wage database also provides insight. Look up the living wage for your grad school university’s county and your postdoc university’s county. The living wage will be closer to your grad student salary than your postdoc salary, but the difference between the two will also help you determine how much of an increase or decrease in cost of living you will experience.

A more involved but also more effective step if you have not yet moved to your new city is to sketch a budget. Using your best estimate of your take-home pay based on the above factors, research how much you are likely to spend on housing, food, transportation, etc. if you kept your perceived lifestyle the same from grad school into your postdoc. Ideally, this exercise will help you decide in which areas of your budget you are able and would like to upgrade your lifestyle, such as living without a roommate.

Personal Experience with the Transition to a Postdoc Position

My husband stayed in his PhD advisor’s lab for an extra year as a postdoc to finish up a few papers before applying for a “real” multi-year postdoc at another institution. My husband received one postdoc offer that he seriously considered before ultimately choosing a position in industry. We performed the calculations above regarding increased taxes and insurance costs to compare the take-home pay of his new postdoc offer directly to the take-home pay from his short-term postdoc and graduate student positions. The take-home pay from the postdoc offer was slightly less than that of his short-term postdoc position and much higher than his pay as a graduate student.

However, when we compared the cost of living in our grad school city, Durham, NC, to the cost of living in Boston, MA, where the new offer was from, we were shocked by the results. In terms of the effective purchasing power from my husband’s take-home pay, the pay for the postdoc position in Boston was “less” than even his grad student pay in Durham. We would not have expected to experience an effective pay decrease moving from a grad student position to a postdoc position, but that is how the numbers worked out. I’m very glad that we took the time to do those estimates before he made a final decision about the offer.

Further reading: An Agonizing Decision

While the gross pay from your new postdoc position may seem great in comparison with your grad student pay, don’t be fooled! You must account for several important changes in taxes, benefits, and cost of living to compare apples to apples.

Why It Matters How You Are Paid

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If you look across a sample of graduate students receiving stipends within any given field, you will find that they have quite similar day-to-day activities: taking or teaching classes, researching, writing articles or chapters, applying for funding, etc. However, behind the stipends that allow these students to engage in their studies are two very different types of sources, which the student’s tax forms reveal. (This distinction and the tax-related details herein are for graduate students in the US.) Whether a student has one type of funding or another has implications for his taxes, access to retirement accounts, and possibly university benefits.

A version of this article first appeared on GradHacker.

The two types of pay that provide stipends to graduate students are ‘compensatory’ and ‘non-compensatory.’ Compensatory pay is given in exchange for work. Typically, this work is in the form of an assistantship – research, teaching, or graduate. Non-compensatory pay is given as an award, and there is (according to the IRS) no work requirement for receiving it. Typically, this award is in the form of a fellowship or participating in a training grant. (Scholarships that go toward paying tuition, fees, and/or health insurance premiums are another form of non-compensatory pay.)

why it matter how you are paid

The type of pay that is behind a graduate student’s stipend potentially affects several aspects of her finances, depending on the university’s policies.

1) The tax forms generated by each type of pay differ. Students with compensatory pay will receive a W-2 in January. Students with non-compensatory pay will see their pay listed on, depending on the university’s policies, a 1099-MISC in box 3, a 1098-T in box 5 (probably summed with the scholarships received), or an unofficial courtesy letter. It is also possible that students with non-compensatory pay will receive no additional notification at tax time. Despite these different reporting mechanisms, a graduate student will report both types of pay in line 7 of his 1040 (with “SCH” denoted next to the line to indicate non-compensatory pay).

2) Graduate students receiving compensatory pay will have the opportunity to have income tax withheld from their stipends, while graduate students receiving non-compensatory pay may or may not, depending on the university’s policy. If students receiving non-compensatory pay do not have the option to have income tax withheld, they may have the responsibility of paying quarterly estimated tax.

3) With rare exceptions, graduate students cannot elect to contribute to retirement accounts at their universities. Therefore, graduate students who wish to save for retirement inside a tax-advantaged account typically opt to contribute to an Individual Retirement Arrangement (IRA). However, only compensatory pay (aka ‘taxable compensation’ or ‘earned income’) is eligible to be contributed to an IRA. Graduate students who receive only non-compensatory pay in the course of a calendar year (and are not married to a person with compensatory pay) are not eligible to contribute to an IRA in that year (though they can still save for retirement).

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4) Full-time graduate students typically do not pay FICA tax on their stipends, but the reason for this is different between the two types of pay. Graduate students with compensatory pay enjoy a student exemption to FICA tax, whereas non-compensatory pay is not subject to FICA tax in the first place. This distinction is important if graduate students ever become predominantly viewed as employees rather than students, which sometimes occurs in the summer when they are not enrolled in classes. In that situation, they might lose their FICA exemptions temporarily and have to pay additional tax.

5) The benefits that universities extend to students may differ based on their status. Graduate students receiving non-compensatory pay are unambiguously students in the eyes of the university. Graduate students receiving compensatory pay are both students and employees, and universities have varying views on which half of that balance is dominant. In some cases, when graduate students are considered employees, different or additional benefits may be extended to them that graduate students who are only students do not receive, such as union membership, childcare subsidies, and pensions.

While graduate students receiving compensatory and non-compensatory pay likely have very similar roles within the university, you can see that the IRS and the universities draw a number of distinctions between the groups that become important at some points in a graduate student’s career. If you are unsure which type of pay you are currently receiving or received earlier in the calendar year, you can either wait to see which kind of tax form you receive (W-2 for compensatory, anything else or none for non-compensatory) or inquire within your university’s payroll or financial aid office.

Have you received compensatory, non-compensatory, or both types of pay during graduate school? Was there a time that you realized that your type of pay affected your life materially? Do compensatory and non-compensatory students receive any different benefits at your university?