Hi,
As a resident, I received a monetary award/ stipend from an organization for being selected as a "fellow" in their program. The money was not for any services that I performed for them, but rather could be used to pay for any educational activity I wanted to attend or supplies that I wanted to purchase. I used the money to attend a conference and to buy a laptop computer. My understanding is that this stipend should not be taxed. Unfortunately, I was sent a 1099-MISC form with the money reported as "Nonempolyee compensation", rather than as "Other Income box". Someone advised me to not input any money onto the nonemployee compensation space on my federal tax form, but to direct the IRS to an attached statement explaining that the money was a stipend used in its entirety to purchase a computer and attend a conference. Is this the best way to handle this situation? Can I expect a phone call from IRS when my tax form doesn't match the 1099-Misc?

Zip Code: sujatha_sing@hotmail.com

Our understanding of the rules is that a stipend such as the one you described is not subject to social security taxes. That's because your stipend is an allowance that allows you to pay your bills while you're involved in your training, and is not compensation for services provided.

Unfortunately, the 1099 was not prepared accordingly. The amount of your stipend should have been reflected in box 3, other income. By putting your income in box 7, non-employee compensation, the payor is implying that your income should be subject to self-employment taxes.

You might hear from the IRS regarding this issue. If you do, simply explain your situation, and they should waive the additional taxes they assessed.

Keep in mind that your stipend is subject to federal and state taxes, however. You should be able to reduce the taxable amount of your stipend by direct expenses that you needed to pay.

Zip Code: cpa@mdtaxes.com