Stipend vs. salary: Key differences explained

A competitive compensation package is a crucial aspect of an effective recruiting strategy. However, the amount you offer prospective employees isn’t the only element that matters. How you pay them is also a vital consideration.

Stipends and salaries are two common compensation models that can attract and retain top talent. Salaries are fairly standard, but stipends (whether they supplement a salary or stand alone) offer unique benefits to workers. So, how do stipends work?

Here, we’ll help you compare stipends versus salaries to determine which approach aligns with your company’s goals and your workforce’s expectations.

Defining stipends and salaries

Although both contribute to an employee’s overall earnings, salaries and stipends serve different purposes and have unique implications.

What is a stipend?

A stipend is a fixed amount a company pays its employees to cover specific expenses. Stipends often cover costs related to education, travel, professional development, or working from home.

A stipend isn’t a bonus or a commission. It’s a financial support mechanism for particular needs rather than direct compensation for work.

What is a salary?

A salary is a fixed, regular payment to employees for their work. Unlike hourly pay, it doesn’t fluctuate based on productivity or hours worked (except in cases where overtime pay is required), meaning salaried employees enjoy greater stability.

Differences between stipends and salaries

Employers that understand the difference between stipends and salaries can design effective compensation packages to meet the needs and merits of their workforce while maintaining compliance with tax laws and financial regulations.

Here are the primary differences between these compensation types:

Taxes

In the United States, the Internal Revenue Service considers stipends income, meaning stipends are taxable. Depending on their nature, stipends might be subject to different tax regulations from salaries. For example, some stipends might not have payroll taxes withheld, but they must still be reported as income.

Salary is subject to payroll taxes, including federal and state income taxes, Medicare, and Social Security. Employers usually withhold these taxes from each paycheck.

Fixed payment

Stipends are paid out periodically or in a lump sum. Employees often receive a monthly stipend, but they can also be doled out annually or over a different period. They are predetermined and independent of performance or hours worked, making stipends a great aid in budgeting and financial planning for employees.

Salaries usually require no further negotiation after the initial employment contract is finalized, but they can vary depending on the employee’s role, performance, and experience. They’re paid in consistent intervals, often biweekly or monthly.

Reimbursement model

Stipends can be reimbursement-based, meaning employees submit receipts or proof of expenses to receive the stipend amount. This model ensures stipend funds are used for their intended purpose.

Salaries do not require expense reports or receipts since the role’s terms and scope of work are agreed upon before the employee is onboarded.

When to provide a stipend

Stipends can be crucial to employee retention and satisfaction. They offer flexible, targeted financial support to address specific needs and enhance the overall benefits package. A well-structured stipend program can significantly improve employee morale, attract and retain top talent, and fortify the workforce’s well-being.

With strategic orchestration and implementation, stipends help companies make targeted offers of financial support, gain tax advantages, and promote a positive, growth-oriented work environment. Here are some essential reasons to provide a stipend:

To provide benefits

Stipends can fund fringe benefits like health and wellness programs, encompassing a more comprehensive employee benefits package. Fringe benefits are a convenient way to boost employees’ job satisfaction and productivity.

To encourage professional development

Employers may also offer stipends to cover courses, certifications, or other professional development opportunities. Continuous learning and skill enhancement will broaden and sharpen your in-house team’s capabilities.

To receive tax benefits

Some stipends can provide tax advantages to employers and employees. For example, educational stipends can be tax-deductible up to $5,250 per year per employee.

To boost retention

Regular stipends for commuting, meals, or unforeseen living expenses can add substantial value for employees, increasing your company’s retention. These stipends lessen financial burdens and reinforce employees’ sense of value in their roles. Consequently, stipends can also increase job loyalty and reduce turnover rates.

Stipends vs. salary increases: Which to offer

Are you looking for ways to reward your employees? You can more easily decide between offering stipends or salary increases when you grasp the benefits and drawbacks of each approach. Both options can substantially increase employee satisfaction and retention, but they serve distinct purposes.

Employer control/management

Employers can provide stipends for specific needs, such as commuting, professional development, or wellness programs. Salary increases offer a general boost in compensation, providing employees with the freedom to spend their additional income as they see fit.

Payment timing

Stipends can be paid monthly, quarterly, annually, or as needed, depending on the situation. Flexibility helps employers offer financial support when it counts the most—useful for addressing employee needs or promoting desired behaviors. Salary increases are usually incorporated into regular payroll intervals, offering employees a consistent and predictable income boost.

Benefits

Stipends can enhance a benefits package tailored to specific expenses like education, health and wellness, or commuting costs, creating tangible perks for employees’ well-being and growth. Salary increases contribute to the overall financial stability of employees, which is generally more attractive given the long-term benefits. Although straightforward, they lack the targeted impact of stipends.

Optimize your compensation strategy

Global businesses need a flexible and comprehensive compensation strategy. This may sound like a tall order, especially when hiring employees from around the globe, but Oyster’s Total Rewards makes it easy.

Oyster designs the best compensation approach for every company. Our global employment platform lets you tailor your compensation strategy to the needs of your employees and your business, even blending targeted stipends and market-adapted salaries. Attract and retain industry-defining talent with Oyster.

About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.