Who you hire in your lab matters when it comes to employment regulations.
Two students stand in a lab, pipetting their hearts out. They look as though they are doing identical tasks, but one is training and one is working. Which is which? It depends on the funding sources and their requirements, and not necessarily on the nature of the activity performed. In fact, classifying a “trainee” a “worker” — or the other way around — is misleading and could lead to audits by the funding agency and the IRS.
Like in philosophy and many other disciplines, the intent is what matters. For instance, sponsoring agencies, such as the National Science Foundation or the National Institutes of Health, may pay stipends or participant support costs to trainees instead of salary and wages for performing a service. This stipend is paid to the student because they have been chosen for a specific type of training. We understand these to be fellowships/scholarships, training workshops, conferences or summer school programs. Of course, the sponsoring agencies also pay for salaried employees with all the implications that arise from that, including withholding payroll taxes.
Though Principal Investigators (PIs) will argue, and rightfully so, that all graduate students in their labs are “trainees.” Beverly Rymer, director of Contracts, Audits and Policy at the University of Houston, said that often we have to remind PIs that any benefit they may derive from students supported as trainees is incidental. The purpose of the stipend is to benefit the student first and foremost, whereas a PI is the direct beneficiary of the work done by students paid a salary on their grant.
Semantics: Fellowships, student workers, workshop participants and interns
“There is a student who works in my lab,” you may hear a faculty member say. Then that student must be paid through payroll and have the necessary taxes withheld from their paycheck. If the student is getting paid through a federal program classified as training and not “work,” then they are learning from a mentor. While taxes still need to be paid on this type of payment, it is completely the student’s responsibility. Reminding graduate students and postdoctoral fellows to pay taxes on their stipends is a good idea, but there is no federal tax withheld by the university with this sort of payment.
“When I was a graduate student at Cornell, I remember we were reminded as students that we should put some of our stipend in reserve, since we would eventually owe taxes on it,” said Claudia Neuhauser, associate vice president for research in the UH Division of Research. “If a student is a participant — not an employee — the monies do not get run through payroll. But that doesn’t exempt the student from having to pay taxes. It’s just that the Office of Contracts and Grants and the tax office at the university system level do not take on any responsibility. The responsibility is completely on the fellow to pay taxes on their stipend,” explained Rymer.
Stipend payments for students to attend workshop trainings are another area worth exploring. For instance, you’re a PI engaged in a project for a sponsor, but as part of the project, you proposed and budgeted for hosting a workshop. In this workshop, students will attend and learn about research techniques using Legos. You want to have the brightest students show up for the workshop, so you offer a stipend to each participant. The students who come are being trained by an expert in the field and, at any moment, a student could develop an innovative model or design component that the PI later incorporates into his or her work. The benefit to the student is what enables the university to classify the payment as a non-service stipend instead of compensation via payroll. The benefit to the PI or workshop leader — say, they really enjoy teaching or they get a new idea from the workshop participants — is incidental. Internships are a little bit different from fellowships. An internship status is determined by the extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, expressed or implied, suggests that the intern is an employee — and vice versa.
Where does the discrepancy, which opens the doors to audits, fines and payback requirements, come in? The answer is with how you treat the student, not the nature of the work (to an extent) or even the faculty member’s genuine enjoyment of mentoring a student in the lab. The faculty member’s joy for teaching — the inventive, creative work of the profession — matters very little to the IRS. And if one were to treat a fellow/trainee like a worker, there will be audit consequences.
There are two auditing bodies. The university’s tax office, presided over by a tax attorney, can be audited by the IRS. The tax office at the university level only cares about proving who is benefitting from the student’s performance; if, based on their review, the PI’s research is the primary beneficiary of the student’s activities, they view the payment as services that must go through payroll.
At the same time, the Office of Contracts and Grants(OCG) can be audited by the federal agency, the Office of Inspector General. OCG must ensure that funds awarded by the various agencies are used for the purpose provided. “That’s where the big trouble comes in,” said Rymer. “If a funding agency gives you money for participants’ support cost, or fellowships/scholarships, and the university chooses to use it for salary and wages instead, this can become an audit finding.”
For example, a department misclassifying an employee as a fellow could be found responsible for payroll tax withholding (FICA, federal and state income tax) for both the employee and the university — typically more than 40% of the amount paid. Conversely, suppose a department misclassifies a fellow as an employee using funds provided by an agency for fellowship/scholarship stipends for payroll instead; when audited, the university will be required to repay the government the stipend funds awarded.
The IRS and university tax offices look for patterns. The consequence of paying back payroll taxes, not to mention fines that may occur, can be severe. It only follows that where one discrepancy arises, more will begin to surface — tax specialists will begin digging where there are red flags. If there are 1,000 stipends paid out to students and seven, for example, have come back with questionable tax practices, there will be an inquiry into that university’s practices. To avoid this, be sure you treat your fellows like trainees and treat employees as workers. Enjoy teaching or training the fellow how to pipette, in other words, but pay the worker to do the pipetting. Most importantly, include in stipend payments backup documentation a description of the training techniques, funding sources and tax office vetting checklist to reduce the chances that both types of auditors find the university non-compliant.