By Anna Baumgardner | 8/11/2020
You are planning to hire an intern. You might assume that interns don’t receive many of the same benefits as employees – paid time off, insurance, retirement benefits – and now you’re wondering if you can pay your intern a flat stipend instead of an hourly wage that must be submitted through payroll.
What determines how an intern should or should not be paid? Are there additional considerations? Lucky for you, we are here to answer these questions.
What are the types of internships?
The starting point for determining how to pay an intern begins with understanding what type of internship you have. Internships fall into two categories:
- internships where the intern works for the employer’s benefit, and
- internships where the intern is primarily with the employer to learn a trade or gain experience for their own benefit.
When an intern works for the employer’s benefit, on-the-job training or onboarding are typically included, and the intern is then expected to turn out a usable product for the employer or to function as support staff. The internship may be a rotating role, but there is usually work assigned and performed by the intern as part of daily operations. An example of this would be an intern hired to assist a CFO in preparing financial reports and keep up with data entry.
When an intern is hired to learn a trade or gain experience primarily for their personal benefit, they will typically not take on a significant production or support role and are under constant supervision of another, permanent employee. The intern is generally not expected to produce consistent output for the employer, but participates in the internship in order to learn and gain experience with a particular skill for future use, as they are there to gain a thorough understanding of the application of a new skillset through observation. An example of this would be an intern participating in a work study or fellowship to complete a medical program.
Now, let’s examine the pay options.
Workers are classified as either contractors or employees. Whether or not they are a contractor or employee depends upon the control exerted over the worker’s behavior by the employer, and the relationship between the worker and the business. The IRS provides guidance and a recent fact sheet on this distinction, as well as Form SS-8 to help businesses and workers work through the differences. A business exerts control over an employee by determining the facilities and tools used, the time when work is performed, and often by constricting the extent to which the worker may provide services to others. Conversely, no such control is exerted over a contractor. The relationship between the worker and business must also be evaluated, including any written contracts describing the terms and length of the relationship, whether the worker is provided with any non-wage benefits such as insurance, retirement, or PTO, how integral the worker’s services are to the business, and the extent to which the worker incurs unreimbursed business expenses. Although paid interns are not usually eligible for the same benefits as regular employees, they are still classified as employees because the employer does exert the same amount of control over interns as they would any other employee.
Interns hired to work for the employer’s benefit must be treated the same as any other employee. As far as wages, this means that interns should be paid at least the federal or state minimum wage (whichever is higher) through payroll, which will then be reported on an annual W-2.
Okay, but when can an intern be paid a stipend instead of an hourly wage?
Traditionally, a stipend is only applicable when the internship is more for the intern’s benefit than the employer’s. These are typically unpaid internships. A stipend may be paid not as wages, but with the intention of covering or defraying living expenses or expenses the intern may incur “on the job.” We can think of the key distinction as, in cases where the primary non-monetary benefit is to the employer, the DOL is likely to interpret payments made to interns as wages, which would be subject to minimum wage laws. According to the US Labor Department’s April 2010 Fact Sheet #71, there are six criteria which qualify the relationship as an unpaid internship, and exempt interns from the minimum wage requirement and overtime laws if met. These six criteria are:
- the training, even though within the premise of the employers’ facilities, is similar to an academic or vocational school,
- training is primarily for the benefit of the trainees,
- trainees do not displace regular employees, but work under close supervision of current employees,
- employers that provide the training derive no immediate advantage from trainees’ activities,
- trainees are not expressly entitled to a job at the completion of the training/internship period,
- and trainees are not entitled to wages for the time spent in training, as they would be under regular employment.
Frequently, organizations wish to pay interns a flat monthly stipend through accounts payable to cover transportation and incidental costs, instead of paying an hourly wage through payroll. Unless the internship is primarily for the benefit of the intern, this arrangement is not in compliance with labor laws. It should be noted that, in some cases, stipends may be given to paid interns in addition to regular hourly wages, in place of dollar-for-dollar reimbursements for expenses such as on-the-job travel, or office supplies purchased by the intern. In these cases, the taxability of the stipend depends on the structure of the reimbursement. Stipends to cover reimbursements should only be paid where an accountability plan is set up. An accountability plan, which should be implemented for all employee reimbursements, is a company policy that requires all reimbursed expenses to have a business connection (are not personal expenses or unrelated to the employer’s work for the business), and that the employee provide support (such as a receipt) for the expense. Expense reimbursements under an accountability plan are not considered taxable income to the employee. Without such an accountability plan, reimbursements or a stipend would be interpreted as additional, taxable wages.
If you still have questions or would like to discuss the specifics of your internship do reach out to us!
Anna Baumgardner is a licensed CPA who advises and provides outsourced accounting and CFO services for tax-exempt clients at RY CPAs.