College and high school students are frequently utilized by businesses and non-profit organizations as interns. These arrangements can be beneficial to the organization as the organization may get the services and insights from the intern, even though the organization receives no immediate tangible benefit. The intern may benefit by obtaining valuable on-the-job training, an entree into a permanent job, college credit, and maybe a few dollars in earnings. Internships vary greatly. They may be paid or unpaid; for college credit or not for credit; highly structured as in a college program, or an independent arrangement with less structure.
As an organization employing an intern, what are your tax responsibilities toward the intern? Once again, we see a variety of possibilities here. The internship may be unpaid, which carries no tax reporting responsibilities for the organization. If it is a paid internship, the intern may be given a 1099-MISC, or a W-2. This brings up several important issues. Under what circumstances may an internship be unpaid? If it is a paid arrangement, when can the organization properly give the intern a 1099 instead of a W-2? As you may imagine, it is not up to the organization or the intern to make that decision.
An organization cannot just designate workers as interns and treat them as such. There are some very specific rules set out by the Department of Labor, specifying when an individual may be classified as an intern and not an employee. A person is considered an intern only if all of the following conditions are met.
- The training is similar to that which would be given in a vocational school. It does not matter that the work occurs in the actual workplace and not in an instructional setting.
- The training is for the benefit of the trainees or students. Note that there is nothing here regarding benefits, or lack thereof, accruing to the organization.
- The trainees or students do not displace regular employees, but work under close observation or regular employees.
- The employer that provides the training derives no immediate advantage from the activities of the trainees or students; and on occasion his operations may actually be impeded.
- The trainees or students are not entitled to a job at the conclusion of the training period. However, it is frequently the case that interns may be offered employment at the termination of the internship or after the intern has completed pursuit of his or her degree.
- The employer and trainees or students understand that the trainees or students are not entitled to wages for the time spent in training. This does not preclude the payment of wages or a stipend, but it is not to be expected.
As mentioned above, Interns can be paid a nominal fee. This is defined as 20% of what a regular worker for would be paid for the work done by the intern. In practice, this set of rules is frequently applicable in non-profit organizations rather than a for profit business.
- Results of the work must not be tied to productivity. A nominal amount may be paid on a “per call” or similar basis similar to how volunteer firefighters would be paid.
- The distance traveled and the time expended by the individual may be considered in setting the fee.
- Another factor is whether the individual has agreed to be available around the clock or only during certain specified time periods. This stipulation is actually designed for volunteer firefighters and is not often applicable in a typical work situation.
- If the individual is someone who volunteers to provide periodic services on a year-round basis they can get a nominal monthly or annual stipend or fee without losing volunteer status.
- The Department of Labor will examine the total amount of payments made (expenses, benefits, fees) in the context of the economic realities of a particular situation to determine whether paying those amounts means the person loses his or her volunteer status.
When an intern is paid, that person is not considered an employee, and any compensation should be reported on a Form 1099-MISC. This should include any expense reimbursements. In most cases, the intern should report the earnings on line 21 of the 1040 (Other Income) and are not considered self-employed. Therefore, an internship stipend is generally not subject to self-employment taxes.
A characteristic of a good, valid, internship carries with it a well-planned curricula designed to train interns in their chosen field of work. It is not a situation where the intern is treated as a “Girl (or Boy) Friday” who performs mundane tasks for the organization. These can be very beneficial to the intern, who receives an opportunity to develop skills and learn about working in their chosen field. For the organization, they may reap the benefit of a source of new employees after the termination of the formal internship.
Author: John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.