As a student with a job as part of your financial aid package, you may find yourself wondering about the taxation of your work-study earnings.
In this article, we’ll walk you through the details to clear up any confusion. We’ll cover the tax implications, exemptions, advantages, and how to file taxes for your work-study position. So let’s get started!
Are All Work-Study Earnings Taxed?
The short answer is yes, your work-study earnings are subject to taxation. Just like any other job, federal work-study income is subject to federal and state payroll taxes. You are required to report this income when you file your taxes. However, FICA taxes (social security and Medicare taxes) may be exempt if you are enrolled in 6 or more credit hours or are working on campus.
But don’t worry! The good news is that your work-study income does not count against your FAFSA® (Free Application for Federal Student Aid) financial aid award. So, when you apply for financial aid in the future, the income you made from your work-study positions won’t impact your eligibility.
Are All Work-Study Jobs Taxed?
No, not all work-study earnings are taxed. There are a few exemptions when it comes to taxable work-study income. For example, if any part of your work-study involves teaching or conducting research under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship, the earnings from these specific programs are tax-exempt. Additionally, degree candidates at an eligible college may also be able to exclude their work-study income from their taxes if they use the money to pay for qualified educational expenses.
It’s important to discuss these exemptions with a tax accountant to ensure that you file your taxes correctly and take advantage of any available tax benefits.
Why Are Work-Study Job Earnings Taxable?
Although federal work-study programs are a type of financial aid, they differ from grants or scholarships because they allow you to earn money for expenses rather than taking out a loan. Therefore, these earnings need to be included in your tax return.
The IRS considers work-study income as taxable because the earnings are not directly applied to tuition or other qualified education expenses. Instead, you receive the money as a paycheck, just like any other job. You have the flexibility to use this income for various purposes, such as covering cost-of-living expenses.
Since there are no restrictions on where the money goes, the IRS treats work-study earnings like any other job income for tax reporting purposes.
What’s the Advantage of Work-Study If It’s Taxable?
You may be wondering why you would choose work-study when there are higher-paying job options available, considering that work-study income is taxable. Well, despite being subject to taxation, work-study comes with significant advantages for students compared to other jobs.
The main advantage is that the money you earn through work-study doesn’t count against your financial aid package when you file the FAFSA® for the next year. This means it won’t diminish the amount of financial aid your college awards you.
Additionally, work-study jobs are typically associated with your college, making it easier to coordinate your work schedule with your class schedule. This provides you with the opportunity to generate income for your education while maintaining a flexible schedule. Unlike jobs in the private sector, which can affect your financial aid and often have more rigid hours, work-study jobs allow you to balance your student life and work life without sacrificing crucial financial aid.
What Tax Exemptions Can I Get?
If you use your work-study earnings to directly pay for qualified education expenses, you may be eligible for the American Opportunity Tax Credit. This credit offers a maximum benefit of up to $2,500, including 100 percent of the first $2,000 in expenses and 25 percent of the following $2,000. Be sure to take advantage of this credit when you file your tax return.
Furthermore, in some cases, you may qualify for tax-exempt work-study income. Certain government agencies, nonprofit organizations, and specific health programs may offer exemptions from taxes on work-study earnings. Programs like the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship outline specific tax exemptions for work-study income.
Work-study programs provide significant benefits for students who demonstrate financial need and struggle to find work or cover educational expenses even with financial aid. Understand how work-study income is taxed, and determine if you’re eligible to reduce or eliminate taxes to make the most of your work-study experience. Seek guidance from a tax consultant to explore all your options and maximize your savings.
How to File Taxes For A Work-Study Position
Your employer will provide you with a W-2 form that contains all the necessary information to file your income taxes. To file, you can use the IRS 1040EZ or 1040 forms. Upon completing the filing, you may be eligible to receive an income tax return.
The good news is that you don’t have to pay to file your income taxes from your work-study position. The IRS provides a free tax filing tool that you can utilize. To make the filing process smoother, avoid delaying the process. Give yourself enough time to gather all the required information and ensure an easy filing experience.
Finally, remember that even though work-study income does not count against you, you should include it as earnings when filling out the “student income” section of the FAFSA®.
Also see: Work-Study Eligibility: How to Determine and Apply
Conclusion
Work-study positions offer students valuable work experience and provide them with a solid financial foundation after college graduation. While taxation is a factor to consider, the advantages and potential tax benefits of work-study make it an excellent choice for students seeking financial independence and academic success.
