How to determine if U.S. federal taxes would apply to postdoctoral fellowship income?

Question

I'm confused about whether a post-doc would owe federal taxes.

The post-doc in question is paid through a foundation associated with a university, but not by the university itself. The foundation's staff didn't withdraw any taxes from the payments and seems to think the postdoctoral fellowship should be tax-free, perhaps because it is considered a stipend.

When I look online, most websites seem to flatly state that a [U.S. citizen] post-doc definitely has to pay federal taxes (even including quarterly estimates). However, I understand that some post-docs getting their funds from particular sources (like the NIH) have claimed that they don't have to pay taxes.

I understand that a post-doc would not have to pay taxes if he or she were enrolled in courses and working toward a degree. In this post-doc's case, he is enrolled in a class for administrative purposes and the institution or foundation pays the tuition for him, but he is not as far as he knows considered working toward a degree.

Does anyone have insights on how to determine whether a post-doc owes taxes, and in particular under the circumstances I've described? Thank you in advance!

Answer 1

The fellowship is almost certainly taxable income for income tax purposes, even if you are enrolled and working toward a degree. This IRS page says:

Qualified scholarship and fellowship grants are treated as tax-free amounts if the following conditions are met:

You are a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and

Amounts you receive as a scholarship or fellowship grant are used for tuition and fees required for enrollment or attendance at the educational institution, or for fees, books, supplies, and equipment required for courses at the educational institution.

I have emphasized the "and". Being enrolled is not enough, and whether it's paid by the university or by another foundation is irrelevant. What matters is whether the money you receive is actually used to cover your tuition/books for degree-oriented classes. This IRS page also notes:

The fact that remuneration is termed a "fee" or "stipend" rather than salary or wages is immaterial.

So whether the foundation "considers it" a stipend doesn't matter.

Information from this IRS bulletin and this page at Rutgers suggests that "student-employees" are exempt from the payroll tax (i.e., Social Security and Medicare). But this just means that your paycheck will be larger because it doesn't have that tax taken out (i.e., it's not a tax you would have paid "manually", it's a tax your employer would have taken out of your paycheck). The amount you are paid is still taxable income for you.