Stipend vs. salary: Key differences for employers

When it comes to compensation, employers have options. Salary and hourly wages are the most common, but stipends are another tool in the toolkit—often used alongside regular pay to cover specific expenses or provide additional support. And in certain situations, they can be a smart choice for both the employer and the worker.

But what exactly is a stipend? How does it differ from a regular salary? And when does it make sense to offer one versus the other? In this article, we'll break down everything you need to know about stipends vs. salaries.

What is a salary?

First, let's define what a salary is. In simplest terms, a salary is a fixed amount of money an employer pays an employee for work performed. It's typically expressed as an annual sum, like $72,000 per year.

The key characteristics of a salary are:

• It's a guaranteed amount that doesn't vary based on hours worked or results achieved (unlike an hourly wage or commission).
• It's paid out on a regular, recurring basis—usually biweekly or monthly.
• It's subject to income taxes and withholdings like Social Security and Medicare.
• It's often accompanied by a comprehensive benefits package including health insurance, retirement plans, and paid time off.

So when you think of traditional, full-time salaried employees, you're generally talking about someone who receives a set paycheck every pay period, along with a package of benefits.

How does a salary work?

To calculate an employee's salary paycheck, you typically start with their annual salary and divide it by the number of pay periods in a year. So if an employee earns a $72,000 annual salary and gets paid biweekly, their gross pay per paycheck would be $2,769.23 ($72,000 / 26 biweekly pay periods).

From there, you withhold applicable federal, state, and local income taxes, as well as the employee's share of FICA taxes (Social Security and Medicare). Depending on the benefits you offer and the employee's elections, you may also deduct things like health insurance premiums, retirement plan contributions, and charitable donations.

The amount left over after all those withholdings and deductions is the employee's take-home pay or net pay. That's the actual amount that hits their bank account each payday.

It's important to note that while a salary is expressed as an annual amount, an employee who leaves or is terminated mid-year is typically only entitled to pay for time worked, plus any additional compensation required by state law, employment contract, or company policy.

What is a stipend?

A stipend is a fixed sum of money paid to a worker for a specific purpose. It's often provided to help cover expenses related to the job, such as travel costs, housing, or office supplies. But stipends can also be used to provide extra compensation for things like job training, advanced degrees, or working in a high-cost area.

The key characteristics of a stipend are:

• It's a fixed sum that's not tied to hours worked or tasks completed
• It's usually paid in addition to a regular salary or wage (though some positions may be fully stipend-based)
• The amount and purpose of the stipend is set by the employer
• It may be paid on a recurring basis (like monthly) or as a lump sum
• It's often treated as taxable income, though there are exceptions

In some ways, a stipend is like a bonus or allowance. But while a bonus is typically merit-based compensation (awarded for hitting certain goals or milestones), a stipend is generally intended to cover specific costs associated with the job.

How do stipends work?

The mechanics of paying a stipend can vary based on the purpose and the employer's preferences. Companies typically offer stipends and other fringe benefits to support employees with common expenses like technology, wellness programs, educational costs, and health benefits.

Stipend payments fall into three categories according to IRS guidelines: pre-tax, non-taxable, and taxable benefits. In most cases, stipends are treated as taxable income, subject to income tax withholding and FICA taxes, and must be reported on an employee's W-2. However, some stipends that qualify as business expense reimbursements may be non-taxable.

The IRS has strict rules around what qualifies as a non-taxable reimbursement, so it's critical to work with your finance and legal teams to ensure proper classification and reporting.

7 types of stipends

So what kinds of costs might merit a stipend? The possibilities are quite broad, but here are some of the most common types of stipends:

1. Internship stipends 

Many companies offer stipends to interns in lieu of an hourly wage. These payments are meant to help students cover living expenses while they gain valuable work experience. Unlike wages, internship stipends aren't tied to hours worked.

2. Wellness stipends

Some employers provide a monthly or annual stipend to encourage employees to invest in their health and wellbeing. Workers might use the funds for things like gym memberships, fitness classes, stress reduction programs, or ergonomic office equipment.

3. Transportation stipends

With the cost of gas and public transit on the rise, transportation stipends are an increasingly popular perk. Employers might provide a set monthly allowance to help cover an employee's commuting costs. Or they might offer a lump sum to remote workers to offset the cost of occasional trips to the office.

4. Home office stipends

In today's work-from-home world, many companies are providing stipends to help employees set up a functional home workspace. These funds might cover things like a desk, an ergonomic chair, a monitor, or faster internet service. Some employers are even offering a monthly stipend to offset the added utility costs of working from home.

5. Professional development stipends

To support ongoing learning and skill-building, some organizations provide a stipend for professional development activities. Employees might use the funds to attend industry conferences, sign up for continuing education courses, or purchase books and training materials related to their field.

6. Relocation stipends

When asking an employee to move for work, employers will often provide a one-time stipend to help cover moving expenses. This might include things like hiring movers, renting a truck, or temporary housing costs. The idea is to reduce the financial burden of relocating for a job.

7. Cell phone stipends

For employees who need to be available outside of work hours or use their personal device for work, a cell phone stipend can help offset the cost of their mobile plan. The stipend is meant to cover the portion of their bill attributable to job-related usage.

These are just a few examples—stipends can be used for all sorts of job-related expenses. The key is to clearly define the purpose and parameters of the stipend, so there's no confusion about how it can be used.

Stipend vs. salary: 6 key differences

Now that we've covered the basics of stipends and salaries, let's dive into the key differences between stipend and salary. 

Here are some of the most important distinctions to keep in mind:

1. Payment structure

Salaries are typically paid out every pay period as a fixed amount (e.g. $2,000 every two weeks). Stipends may be paid on a recurring basis (like a monthly car allowance) or as a one-time lump sum (like a relocation bonus).

2. Eligibility

Salaries are most commonly paid to regular, full-time employees. Stipends can be offered to a broader range of workers, including part-time staff and interns. However, stipends generally can't be used as a substitute for minimum wage for non-exempt staff.

3. Tax treatment

Both salaries and stipends paid are usually considered taxable income. That means they're subject to income tax withholding as well as payroll taxes. However, some stipends may be classified as non-taxable expense reimbursements if they meet certain IRS criteria.

4. Employment relationship

Salary represents direct compensation for work performed, where the worker is considered an employee of the company. Stipends are additional payments beyond regular wages or salary, meant to cover specific expenses or needs like technology, education, or wellness. 

Stipend vs salary: Which one should you offer?

In most cases, employers aren't allowed to choose between offering a stipend or a salary. It depends on the nature of the role and the worker's employment status.

For any employee who is classified as non-exempt under the Fair Labor Standards Act (FLSA), you generally can't pay them a stipend in lieu of wages. Non-exempt employees must be paid at least the applicable minimum wage for every hour worked, plus overtime when they exceed 40 hours in a week. Stipends can be offered on top of wages, but not as a replacement for hourly pay.

Exempt employees—those who meet the FLSA's salary basis test (which requires a minimum weekly salary of $844 and consistent pay regardless of hours worked) and perform certain types of professional, executive, or administrative duties—must be paid a predetermined salary that doesn't fluctuate based on hours worked or results achieved. For these employees, you typically can't substitute a stipend for their regular salary.

So when does it make sense to offer a stipend? Stipends are most commonly used for workers who fall outside the standard employee relationship, such as:

• Interns or summer associates
• Graduate or postdoctoral fellows
• Research or project assistants
• Student teachers or tutors
• Temporary trainees or apprentices

In these cases, the individual is not considered a regular employee, so minimum wage and overtime rules may not apply. Stipends can be a way to provide some financial support and offset job-related costs, without creating a full employment relationship.

For regular full-time employees, stipends are generally offered in addition to a salary (not instead of one). Providing stipends on top of wages can be a great way to enhance your compensation package and show your investment in employees' success.

Why should you offer stipends?

Even if stipends aren't a replacement for salaries, there are still plenty of good reasons to consider offering them. Here are a few of the top benefits:

1. To stay competitive for top talent

In today's hot job market, workers have options. Offering generous stipends for things like professional development, wellness, and work-from-home expenses can be a great way to stand out from the competition and attract top performers. Stipends show candidates that you're willing to invest in their growth and wellbeing.

2. To boost retention and employee satisfaction

Stipends aren't just a great recruiting tool; they can also help keep your current workforce happy and engaged. By offering stipends that support employees' professional and personal development, you demonstrate that you value their contributions and care about their success both inside and outside of work.

3. To create a more equitable workforce

Offering stipends can be a way to level the playing field and make sure all employees have access to the same opportunities and resources. For example, offering a stipend for home office equipment can ensure that remote workers have what they need to be productive, regardless of their personal financial situation.

4. To promote skill development and career growth

Investing in your employees' professional development is a win-win. Workers get the chance to learn new skills and advance their careers, while the company benefits from a more knowledgeable and well-rounded workforce. Offering stipends for things like training courses, certifications, or coaching can be a cost-effective way to support continuous learning.

Streamline compensation with Rippling

Of course, offering stipends comes with some administrative overhead. You need to track eligibility, set clear policies around how stipends can be used, and make sure payments are processed accurately and on time. And that's on top of managing your regular payroll and benefits.

That's where a benefits administration platform like Rippling can be a game-changer. Rippling is an all-in-one HR, payroll, and benefits platform that makes it easy to manage every aspect of your employee compensation in one place.

With Rippling, you can:

• Set up custom stipend policies and eligibility rules based on any employee criteria
• Automatically add stipends to employee paychecks or pay out lump sums
• Let employees view paystubs and benefits through a self-service portal
• Generate reports to track stipend utilization and costs
• Ensure compliance with built-in tax and labor law guidance

Plus, because Rippling seamlessly integrates with your HRIS, time tracking, and expense management systems, you can be confident that stipends are being paid accurately and on time.

Whether you're offering a one-time relocation bonus or a monthly commuter benefit, Rippling takes the hassle out of stipend administration. And that frees up your HR team to focus on more strategic priorities.

Stipend vs. salary FAQs

Is salary taxed?

Yes, salaries are subject to federal income tax, state income tax (where applicable), FICA taxes (Social Security and Medicare), and both federal and state unemployment taxes. These are typically withheld automatically from each paycheck.

Are stipends taxable? 

Most stipends are considered taxable income and must be reported on your W-2. However, some stipends that qualify as business expense reimbursements may be non-taxable under IRS guidelines. Work with your finance team to determine proper tax treatment.

Can a stipend be paid in addition to a salary?

Absolutely. In fact, this is one of the most common ways stipends are used. For full-time employees, stipends are typically offered as a supplement to their regular salary. The stipend is intended to cover specific job-related expenses, while the salary compensates the employee for their core job duties.

Do stipends require payroll processing like salaries?

The answer varies based on the type of stipend. Taxable stipends need to be processed through payroll and reported on W-2s, while qualified expense reimbursements and certain other stipends may be non-taxable and handled differently. Working with your finance team is important to ensure proper processing.

Is a stipend suitable for remote workers or freelancers?

For remote employees, stipends can be an effective way to support home office needs like internet, equipment, and utilities. However, stipends are typically not appropriate for freelancers or independent contractors, as providing them could blur the lines between contractor and employee status.

How is a stipend amount determined?

Companies typically set stipend amounts based on what the stipend is meant to cover, the employee's role and location, market rates at similar companies, and their overall budget. The amount should be fair and consistent across similar employee roles while aligning with the company's compensation strategy.

This blog is based on information available to Rippling as of January 6, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.