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 is neither a wage nor self-employment income. Fellowships and training grants, which I call “awarded income” frequently pay the stipends and salaries of graduate 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 and training grant recipients and how to address them. I’ll clarify right up front that you do need to incorporate your awarded 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).
This article was last updated on 1/25/2022. It is intended for US citizens, permanent residents, and residents for tax purposes. It is not tax, legal, or financial advice.
- How to Prepare Your Grad Student Tax Return
- Grad Student Tax Lie #1: You Don’t Have to Pay Income Tax
- Scholarship Taxes and Fellowship Taxes
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 also come from training grants, such as the NIH T32, and in those cases you might or might not be labeled a fellow by your institution.
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
- Form 1099-NEC
There are other possible mechanism for this reporting; these are the three most commonly used by universities and funding agencies.
None of these forms was designed for reporting awarded income and none do it very well, but they do get the job done if you know what you’re looking for.
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 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 and contractor income used to be reported in Box 7, which no longer exists following the creation of Form 1099-NEC (see next). Fellowship income usually shows up in Box 3, “Other income.” If you are a grad student or postdoc, you are not self-employed; do not pay self-employment tax!
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. It’s less confusing for the IRS and will enable you to take an educational tax break.
The IRS resurrected Form 1099-NEC, which stands for “non-employee compensation,” for tax year 2020. All self-employment and contractor income is now supposed to be reported in Box 1.
Unfortunately, a minority of funding agencies are also reporting awarded income on Form 1099-NEC Box 1. Similar to Form 1099-MISC, if you are certain that this income is fellowship or training grant income and not self-employment income, you should report it as fellowship income on your tax return. If you erroneously report it as self-employment income, you will pay self-employment tax (15.3%) and exclude yourself from taking a higher education tax break.
- How to Prepare Your Grad Student Tax Return
- Where to Report Your PhD Trainee Income on Your Tax Return
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 institutions and funding agencies 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 or training grant 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” and the amount of taxable awarded income 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.
Further reading: Where to Report Your PhD Trainee Income on Your Tax Return
Quarterly Estimated Tax
In my observation, most awarded income 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.
- Fellowship Income Is Now Eligible to Be Contributed to an IRA!
- The Graduate Student Savings Act Fixes a Major Flaw in Tax-Advantaged Retirement Accounts
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
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.
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
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Sierra Deutsch says
Thanks for your wonderful and helpful posts on weird tax situations. I have another weird tax situation and am struggling to find any info on it online. I’m wondering if you can help, or point me toward useful resources? I just had an interview for a postdoc in Europe (I’m a US citizen). I haven’t been offered the position yet, but (in case I do) I’m trying to figure out what my expenses will be so I can negotiate effectively. The postdoc offers a monthly “allowance” which is not taxable in the country where the postdoc would be. However, I’m guessing that I can be taxed by the US federal government and am wondering if you can offer any info on this front? Any advice/sources of information you could offer would be much appreciated. Thanks!
Great question but off the top of my head I’m afraid I don’t… This is probably good territory for hiring a CPA who specializes in this area of tax law (if you accept the position). :/
Bob M says
Thanks for your informative post. I had an NSF postdoc fellowship and have just received notice from the IRS that they put my income in the ‘self-employment’ category and now I owe $10,000. It seems that fellowships to PhD students should not be counted as ‘self-employment’ but the situation is murkier for postdocs. Can you please elaborate or point me to more detailed information? How can I know if my income should be reported as self-employment or not?
Thanks for any help!
Brianna S says
I was wondering what you should do if your fellowship income is put in Box 7 rather than Box 3. You said “1099-MISC Box 7 income that is definitely fellowship income should be reported as fellowship instead of as self-employment.” but how do you do that without being audited if the institution is reporting the fellowship as self-employment?
Well, keep in mind that the income is not self-employment income, it just looks that way form-wise. I have corresponded with a few grad students who have been contacted by the IRS questioning how they reported their Form 1099-MISC income, and it has always been resolved in favor of the grad student with a letter or phone call explaining the fellowship.
What should I do if part of the year you received a fellowship (without W2) and the other part of the year I received income as a research assistant (with a W2)? How do I report both incomes on the 1040 Form?
It’s not terribly complicated to do this, especially if all your education expenses are paid by waivers.
Please see this article: http://pfforphds.com/prepare-grad-student-tax-return/
And if you need additional help: http://pfforphds.com/products/#tax
Thank you for the article! You stated that you received a 1099G for your post-bacc fellowship at the NIH. When you filed your tax returns for your 1099G, did you file the stipend as a taxable scholarship or grant?
That is the proper way to handle it.
I am wondering how a fellowship stipend should be handled if you are not a graduate student yet. My child just received the Mcnair fellowship and I am wondering how to handle.
Congrats to your child on becoming a McNair scholar!
Will you please email me (emily@PFforPhDs.com) your question with some more details on what you’re looking for, e.g., whether to file quarterly estimated tax, IRA eligibility, how to report on tax return, so we can have a more in-depth discussion?
I have an NSF-GRFP fellowship where I don’t receive any tax forms. However, for the 2019 year I opened an roth-IRA. I didn’t realize I didn’t have taxable income at the time. When I go to file my taxes online I am being penalized (I have not sent the form yet, because I am unsure of what to do). Do I pay the penalty now, and next year I won’t since the 2020 definition has changed or do I have to remove the money even though it has earned interest?
Thanks for any help you can give or other resources I should look into.
Thanks for this question! I don’t know the answer for sure. My intuition is that the penalties would continue to apply even though the definition has changed.
Hi Emily! We use TurboTax each year to file. If we need to “straight report that number in Form 1040 Line 1 with “SCH” written next to it. ” as you describe, can we do that in that software?
I believe TurboTax does it for you if you enter your income properly.