When it comes to supporting and retaining your employees, raises are a common way to acknowledge their hard work. But research shows there are better ways to reward your entire team. Employees increasingly desire added benefits and perks over yearly wage increases.
Offering stipends to your employees is another great way to show that you care about them. Employee benefits like stipends are also proven to recruit job seekers while helping employers stay within budget.
But what’s the difference between stipends and salary increases, and when might you want to offer a stipend to your team instead of a raise?
This article will define stipends and explain the difference between providing a stipend vs. a salary increase.
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What is a stipend?
A stipend, sometimes called a lifestyle spending account, is a fixed amount of money offered to employees to help pay for work expenses, travel expenses, living expenses, wellness expenses, and more. There are several types of stipends to choose from.
It’s best to think of these benefits as monthly allowances.
For example, you could provide your employees with the following:
- $100 every month for internet access and cell phone reimbursement
- $80 each month for commuting costs
- $50 every month for a gym membership
- $125 every month for training and professional development
Do you have to pay taxes on stipends?
Much like wages, many stipends are considered taxable income in the eyes of the IRS1. You may also be responsible for any payroll taxes associated with this extra income. All you need to do is add the stipend reimbursements as an extra line item on your employees’ paychecks.
As far as other deductions go, the IRS2 explains that employers generally must withhold Social Security and Medicare taxes from employees' wages, then pay their share as well.
Additionally, federal income taxes are paid for only by the employee. Federal income tax is calculated based on the wages earned over the pay period and Form W-4 details. The employee will also cover local and state taxes.
Why would companies offer a stipend instead of additional pay?
One of the biggest reasons to consider a stipend over a salary increase is simply because employees prefer it. Glassdoor3 finds that nearly four in five employees prefer added benefits and perks to salary increases.
On top of that, a 2022 report from PeopleKeep found that 82% of employees say that the benefits package an employer offers is an important factor in whether or not applicants accept a job, while only 66% of employers think it’s important.
The Guardian Life Insurance Company of America4 also found that only 39% of employees believe their company’s benefits offerings address their physical health. Providing employees with health and wellness benefits is more important than ever in 2023.
Can you pay employees a stipend instead of a salary?
You can't offer a stipend to a regular employee as a replacement for paying hourly wages or to salaried employees who receive a W-2. All workers in the U.S. must meet the minimum wage requirements for their state.
However, there are situations where you may offer stipends to workers who are ineligible for regular salaries. According to Indeed5, a researcher, graduate student, intern, or apprentice would be considered a common recipient of a stipend. These are typically positions where the content of the work benefits the person doing it more than the employer since the focus is mainly on training and learning.
While stipends don’t replace salary increases for long-term employees, fringe benefits are an essential offering for any business. They help provide additional financial support to your employees while helping you remain competitive in the modern job market. But keep in mind, they don’t work the same as providing a pay raise to cover extra employee living expenses.
What are the differences between a stipend and a salary?
While both stipends and wage increases offer additional compensation to employees on top of their base pay, the two work a little differently.
From the way employees are paid to the cost savings for the employer, below you’ll find the three main differences between a stipend and a raise.
While some stipends are like bonuses or salary adjustments, many businesses offer stipends on a recurring monthly basis as reimbursement allowances. A stipend is only paid out when an employee incurs an expense.
Instead of the increased compensation just going to your employees all at once, employees request reimbursement for the qualified expenses they purchase. You then approve their qualified expenses for reimbursement up to their allowance amount.
A benefits administration platform like WorkPerks makes this easy for you and your employees. This model ensures that your employees will use their stipends as intended. For example, if you offer $100 in remote work stipends to help pay for remote work costs, your employees can submit their phone or internet bills for reimbursement up to that amount. Otherwise, your employees could have spent that higher salary on something else entirely, like new clothes.
Businesses also save money when employees use only part of their monthly stipend or annual allowance. This differs from wages, where the full amount goes out with each paycheck regardless. This means you can recoup some of the funds set aside for payment at the end of the cycle.
You can choose to offer different benefits to certain employee groups
Another difference between offering an increased salary to pay for expenses or a stipend is that with a stipend, you can choose to provide different benefits and allowances to employees.
Let’s say that you have full-time and part-time employees. You also have employees who work remotely in a different state than your business is located. You can categorize your employees into classes based on these circumstances.
You have the freedom to give your remote employees in other states a remote work stipend to help them cover their internet costs or work setup. You can also give full-time employees a higher health or wellness allowance than part-time employees.
While you can’t use employee classes to single out and prevent a particular employee from receiving a benefit, you can use classes to determine who’s eligible for a stipend. This means that you can choose to only offer a stipend to full-time employees, for example.
Classes provide an easy way to administer stipends to your different types of employees.
Stipend allowances are fixed, occurring at regular intervals
Unlike bonuses and salary increases, which are usually determined by performance and cost-of-living increases, stipends are awarded to employees at regular intervals, such as monthly.
Stipend amounts won’t change during the year, and employees can decide if they want to take advantage of them or not.
Bonuses are usually based on a percentage of between 2.5 and 7.5% of an employee’s payroll, while stipend allowances are the same for all employees of the same class. This means businesses have complete control over how much money is available to reimburse employees, allowing them to fit any budget.
Stipend vs. salary increase comparison chart
What is it?
Additional wages earned by employees, often to compensate for increased living costs.
A sum of money provided to employees to cover a specific expense as a benefit.
How is it managed?
No management. The employer doesn’t control the use of the employee’s raise or bonus. Employees can use it in any way they want.
The employer controls the intended reimbursement categories and classes, such as paying a higher stipend to employees in certain states. Employees submit requests for reimbursement.
When do you pay employees?
Employers pay workers on their usual paycheck regardless of whether they need or want the extra income for the intended benefits.
Employers only pay for approved expenses when employees request a reimbursement. Employers keep the excess allowances.
How is it taxed?
The employer pays payroll taxes and withholds tax for social security, Medicare, and income taxes.
The employer pays payroll taxes, and employees pay income taxes.
There are several types of stipends to choose from, and they are a great way to offer additional benefits to your employees. Understanding the differences between stipends and salary increases will help you make the right decision for your business.
Are you ready to offer more personalized benefits to your employees? PeopleKeep helps businesses of all sizes manage employee stipends with our easy-to-use WorkPerks benefit administration software. Business owners can provide custom perks through several expense categories, such as health, wellness, and transportation. You can also create a stipend for any other expense you want. With WorkPerks, you can easily offer stipends that best match your company’s culture and the needs of your employees.
Ready to offer stipends to your employees? Schedule a call now to speak with a personalized benefits advisor!
This post was originally published on February 23, 2022. It was last updated on February 23, 2023.