What Kinds of Income Are Taxable?
The following kinds of income often received by students are generally taxable.
- Pay for services performed.
- Self-employment income.
- Investment income.
- Certain scholarships and fellowships.
Pay for Services Performed
When figuring how much income to report, include everything you received as payment for your services. This usually means wages, salaries, and tips.
Wages and salaries. The amount of wages (including tips) or salaries you received during the year is shown in box 1 of Form W-2, Wage and Tax Statement. Your employer will give you Form W-2 soon after the end of the year.
Tips. All tips you receive are income, and subject to income tax. This includes tips customers give you directly, tips customers charge on credit cards that your employer gives you, and your share of tips split with other employees.
Keep a daily record or other proof of your tips. You can use Form 4070A, Employee's Daily Record of Tips. Your daily record must show your name and address, your employer's name, and the establishment's name. For each day worked, you must show the amount of cash and charge tips you received from customers or other employees, a list of the names and amounts you paid to other employees through tip splitting, and the value of any noncash tips you get, such as tickets, passes, or other items of value. Record this information on or near the date you receive the tip income.
Reporting tips to your employer. If you receive cash, check, or credit card tips of $20 or more in any one calendar month while working for one employer, you must report the total amount of your tips to your employer by the 10th day of the next month. If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report on the next day that is not a Saturday, Sunday, or a legal holiday.
To report your tips, you can use Form 4070, Employee's Report of Tips to Employer. To get a year's supply of this form, ask your employer or call the IRS for Publication 1244, Employee's Daily Record of Tips and Report to Employer. Fill in the information asked for on the form, sign and date the form, and give it to your employer. If you do not use Form 4070, give your employer a statement with the following information.
- Your name, address, and social security number.
- Your employer's name, address, and business name (if it is different from the employer's name).
- The month (or the dates of any shorter period) in which you received tips.
- The total tips required to be reported for the period.
Withholding on tips. Your employer must withhold social security tax and Medicare taxes or railroad retirement tax, and any income tax due on the tips you report. Your employer usually deducts the withholding due on tips from your wages. If your wages are too small for your employer to withhold taxes, you may give him or her extra money to pay the taxes up to the close of the calendar year. Your employer should tell you how much is needed.
Any taxes that remain unpaid may be collected by your employer from your next paycheck. If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See Publication 505, Tax Withholding and Estimated Tax, for more information.
Form W-2. The tips you reported to your employer will be included with your wages in box 1 of Form W-2. Federal income tax, social security tax, and Medicare tax withheld on your wages and tips will be shown in boxes 2, 4, and 6, respectively.
Your Form W-2 may show an amount in box 8, Allocated tips. This is an additional amount allocated to you if tips you reported to your employer were less than the minimum amount expected to be earned by employees where you work.
If you do not have adequate records of your actual tips, you must report at least the amount of allocated tips shown in box 8 on your Form W-2.
If you have adequate records, report your actual tips on your return. For more information on allocated tips, see Publication 531, Reporting Tip Income.
If you did not report tips to your employer as required, you may be charged a penalty in addition to the tax you owe. If you have reasonable cause for not reporting tips to your employer, you should attach a statement to your return explaining why you did not.
Reserve Officers' Training Corps (ROTC). Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as that received during summer advanced camp, is taxable.
Example. Jim Hunter is a member of the ROTC who is participating in the advanced course. He received a subsistence allowance of $100 each month for 10 months and $600 of active duty pay during summer advanced camp. He must include only the $600 active duty pay in his gross income.
Self-Employment Income
Earnings you received from self-employment are subject to income tax. These earnings include income from baby-sitting and lawn mowing. These earnings are not self-employment income if you provided these services as an employee.
You are taxed on your net earnings (income you received minus any business expenses you are allowed to deduct). For information on what expenses can be deducted, see Publication 535, Business Expenses. As a self-employed person, you are responsible for keeping records to show how much income you received and how many expenses you had. Your income and expenses are reported on Schedule C or C-EZ (Form 1040). An example of a filled-in Schedule C-EZ appears at the end of this publication.
Self-employment tax. If you had net earnings of $400 or more from self-employment, you also will have to pay self-employment tax. This tax pays for your benefits under the social security system. Social security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have social security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Schedule SE (Form 1040). For more information on self-employment tax, see Publication 533, Self-Employment Tax.
Newspaper carriers and distributors. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions.
- You are in the business of delivering/distributing newspapers or shopping news, including directly related services such as soliciting customers and collecting receipts.
- Substantially all your pay for these services directly relates to sales or other output rather than to the number of hours worked.
- You perform the delivery services under a written contract between you and the service recipient that states that you will not be treated as an employee for federal tax purposes.
Carriers and vendors under age 18. Carriers or distributors (not including those who deliver or distribute to any point for subsequent delivery or distribution) and vendors (working under a buy-sell arrangement) under age 18 are not subject to self-employment tax.
If you were self-employed, you can deduct half of your self-employment tax and part of your health insurance premiums. See the Form 1040 instructions for lines 27 and 28 for more information.
Investment Income
This section explains whether you have to report income from bank accounts and certain other investments. Various types of investment income are treated differently. Some of the more common ones are discussed here.
Interest. Interest you get from checking and savings accounts and most other sources is taxable.
Bank accounts. Some credit unions, building and loan associations, savings and loan associations, mutual savings banks, and cooperative banks call what they pay you on your deposits dividends. However, for tax purposes, these payments are considered interest, and you should report them as interest.
U.S. savings bonds. Interest on U.S. savings bonds is taxable for federal income tax purposes, but exempt from all state and local income taxes. The most common bonds are series EE and series I bonds. Series EE bonds are issued in several different denominations and cost one-half the amount shown on the face of the bond. For example, a $100 bond costs $50. The face value of the bond is paid only when the bond matures. The difference between what you paid for the bond and the amount you get when you cash it is taxable interest.
Series I bonds are inflation-indexed bonds issued at their face value. The face value plus accrued interest is payable to you at maturity.
You can report all interest on these bonds when you cash them, or you can choose to report their increase in value as interest each year. Publication 550, Investment Income and Expenses, explains how to make this choice.
Under certain circumstances, the interest on U.S. savings bonds (series EE and series I) issued after December 31, 1989, is exempt from tax if the bonds are used for educational purposes. See Publication 550 for further information.
Other interest from the U.S. Government. Interest on U.S. Treasury bills, notes, and bonds is taxable for federal income tax purposes. This interest is exempt from all state and local income taxes.
Tax-exempt bonds. Generally, interest from bonds issued by state and local governments is not taxable for federal income tax purposes.
Interest statements. Your bank, savings and loan, or other payer of interest will send you a statement if you earned at least $10 in interest for the year. You should receive these statements sometime in January for the previous tax year. Banks may use Form 1099-INT, Interest Income. However, they may include your total interest on the statement they send you at the end of the year. Do not throw these statements away.
Dividends. Dividends are distributions of money, stock, or other property paid to you by a corporation. You may also get dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Ordinary dividends, the most common type, are paid out of the corporation's earnings. You must report these as income on your tax return.
Dividend statements. Regardless of whether you receive your dividends in cash or additional shares of stock, the payer of the dividends will send you a Form 1099-DIV, Dividends and Distributions, if you earned at least $10 in dividends for the year.
Other investment income. If you received income from investments not discussed here, see Publication 550. Also, the payer of the income may be able to tell you whether the income is taxable or nontaxable.
Taxable Scholarships and Fellowships
If you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.
If you are a candidate for a degree, you generally can exclude from income that part of the grant used for:
- Tuition and fees required for enrollment or attendance, or
- Fees, books, supplies, and equipment required for your courses.
You cannot exclude from income any part of the grant used for other purposes, such as room and board.
A scholarship generally is an amount paid for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be in either a graduate or an undergraduate program.
A fellowship grant generally is an amount paid for the benefit of an individual to aid in the pursuit of study or research.
Example 1. Tammy Graves receives a $6,000 fellowship grant that is not designated for any specific use. Tammy is a degree candidate. She spends $5,500 for tuition and $500 for her personal expenses. Tammy is required to include $500 in income.
Example 2. Ursula Harris, a degree candidate, receives a $2,000 scholarship, with $1,000 specifically designated for tuition and $1,000 specifically designated for living expenses. Her tuition is $1,600. She may exclude $1,000 from income, but the other $1,000 designated for living expenses is taxable and must be included in income.
Payment for services. All payments you receive for past, present, or future services must be included in income. This is true even if the services are a condition of receiving the grant or are required of all candidates for the degree.
Example. Gary Thomas receives a scholarship of $2,500 for the spring semester. As a condition of receiving the scholarship, he must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for his services. Gary is a degree candidate, and his tuition is $1,600. He can exclude $1,500 from income as a qualified scholarship. The remaining $1,000, representing payment for his services, is taxable.
Fulbright students and researchers. A Fulbright grant is generally treated as any other scholarship or fellowship in figuring how much of the grant can be excluded. If you receive a Fulbright grant for lecturing or teaching, it is payment for services and subject to tax.
Pell Grants, Supplemental Educational Opportunity Grants, and Grants to States for State Student Incentives. These grants are nontaxable scholarships to the extent used for tuition and course-related expenses during the grant period.
Reduced tuition. You may be entitled to reduced tuition because you or one of your parents is or was an employee of the school. If so, the amount of the reduction is not taxable so long as the tuition is for education below the graduate level. (But see Graduate student exception, next.) The reduced tuition program must not favor any highly paid employee. The reduced tuition is taxable if it represents payment for your services.
Graduate student exception. Tax-free treatment of reduced tuition can also apply to a graduate student who performs teaching or research activities at an educational institution. The qualified tuition reduction must be for education furnished by that institution and not represent payment for services.
Contest prizes. Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for your education. If you can use the prize for any purpose, the entire amount is taxable.
Qualified state tuition program. If you receive distributions from a qualified state tuition program, only the amount that is more than the amount contributed to the program is taxable. Part of the benefits may qualify as a nontaxable scholarship or fellowship (for example, matching-grant amounts paid under the program to a degree candidate). Other benefits are partly a nontaxable return of the contributions made to the program on your behalf (for example, by your parents). You must include in your income the part of the benefits that is neither a nontaxable scholarship or fellowship nor a return of contributions. For more information about qualified state tuition programs, see Publication 525, Taxable and Nontaxable Income, but for more information on a specific program, contact the state or agency that established and maintains it.
Other grants or assistance. If you are not sure whether your grant qualifies as a scholarship or fellowship, ask the person who made the grant.
Additional information. See Publication 520, Scholarships and Fellowships, for more information on how much of your scholarship or fellowship is taxable.
How To Report
If you file Form 1040EZ, include the taxable amount of your scholarship or fellowship on line 1. Print SCH and any taxable amount not reported on a W-2 form in the space to the right of the words W-2 form(s) on line 1.
If you file Form 1040A or Form 1040, include the taxable amount on line 7. Print SCH and any taxable amount not reported on a W-2 form in the space to the left of line 7 on Form 1040A or on the dotted line next to line 7 on Form 1040.
Other Income
If you are not sure whether to include any item of income on your return, see Publication 525.
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