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I am a graduate student and I receive a stipend that pays my living expenses, through a national fellowship that I was awarded. The fellowship never withholds taxes of any kind, and so I have been making quarterly estimated payments throughout the year. This is the second year of paying taxes with this fellowship, so I've done this once before, but this year things seem odd.

I earned roughly $31,000 in income from this fellowship (monthly stipends of around $2600). This was reported to me on a 1099-misc form in box 3 "other income."

When I fill out my information in the web-portal through H&R Block, however, it says that my base taxes owed are about $6500. This works out to be almost a 21% tax rate, which doesn't seem plausible for someone earning such a small amount and working only as a full-time student.

But I can't see where my error might be coming from. I just put in the information as if it was from a Schedule C (this is what the H&R Block interface suggested that I do). I believe it is treating me as though I qualify for some very high "self-employment" tax rate. But I don't think this can be correct because I'm not really self-employed. This just happens to be the manner in which my funding agency delivers their tax data (basically just so they can avoid worrying about deducting taxes from student stipends across many states and in many unique situations).

My tax rate certainly wasn't this high last year, but I filled out the H&R Block online forms exactly the same way.

Any suggestions on what's going wrong / how I should report this?

Added

When I read the tax document provided by my funding agency, it specifically says that I am treated as an independent contract, but not self-employed. That's the specific wording. How do I communicate that I am being paid as an independent contractor, but that I am not supposed to be paying the self-employment tax? (I'm fairly sure this kind of arrangement is common for science fellowships and research grants.. that is, you're not taxed for self-employment (a silly thing to do to a student already barely able to pay bills... why would they accept the fellowship and earn less than peers who don't accept fellowships?), but you do receive a 1099-misc).

  • Have you figure out the problem yet? I have the same problem here, that after i type the information in, my federal income tax withheld drop from >3000 to -300.... and for students, it is way too high... plz let me know if you know how to do it correctly. – user9640 Mar 28 '13 at 5:20
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according to this presentation (page 13)

The current ruling is that you DO NOT have to pay the SE taxes.

Here is a link to the actual IRS ruling.

I would suggest manually entering the amount in the other income line of form 1040 (line 21) with FELLOWSHIP as the explanation, but perhaps someone else has a better solution.

  • This seems like a sensible thing to do. – ely Mar 13 '12 at 16:57
  • The SE referred to here is basically the entire FICA amount (normally your employer pays half and the other half is deducted from your check). That does not mean you do not have to pay income tax. – user4127 Mar 13 '12 at 19:57
  • manually entering the amount as other income will insure that income taxes but not FICA/SS (also known as SE taxes) are paid. – Pablitorun Mar 13 '12 at 21:51
  • @Chad -- no one is trying to avoid income taxes... note how I mentioned that I already pay quarterly estimated taxes. I was worried about why my total taxes owed came out so much higher than what I had budgeted for the payments I'd been making all year. – ely Mar 14 '12 at 3:37
  • @Pablitorun actually, the self employment taxes are known as SECA. – iheanyi Mar 17 '17 at 16:00
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The instructions for Form 1040 Line 7 say that you should include:

Scholarship and fellowship grants not reported on Form W-2. Also, enter “SCH” and the amount on the dotted line next to line 7. However, if you were a degree candidate, include on line 7 only the amounts you used for expenses other than tuition and course-related expenses. For example, amounts used for room, board, and travel must be reported on line 7.

So, as I understand it, you include your fellowship stipend on Form 1040 Line 7. However, it is not considered wages, and you do not owe self-employment tax on this amount.

Moreover, you may subtract from your stipend any amount you paid for tuition, fees, required textbooks, and similar expenses. This is not taxable income.

I am not a lawyer.

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