Offering stipends vs. salary increases

Raises are a common way to acknowledge your staff’s hard work. But research shows there are better ways to reward your team. An increasing number of employees value benefits over higher pay. In fact, a recent survey found that almost 60% of workers said they would give up some of their salary for better health benefits¹.

As more workers prioritize perks over pay, employers need to rethink their compensation strategy. While salary increases can help you recruit and retain top talent, employee benefits like stipends are another great to attract and keep job seekers But what’s the difference between offering stipends and salary increases? And when is a stipend better than a raise?

This article will explain how stipends function as an employee benefit and the difference between providing a stipend and a salary increase. It will also explore another option for offering a health benefit: the health reimbursement arrangement (HRA).

In this blog post, you’ll learn:

• The key differences between stipends and salary increases.
• How stipends can be a flexible and personalized way to provide employee benefits.
• The advantages of using HRAs as a tax-free benefit for supporting employees’ medical needs.

What is a stipend?

A stipend, sometimes called a lifestyle spending account, is a fixed amount of money employers offer their employees. Employees can use their stipend to help pay for various expenses. Common expenses stipends can cover include those for work, travel, living, wellness, and more.

Employers who offer a stipend typically offer it as a one-time stipend or provide funds on a regular basis.

For example, you could give your employees 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

Employers often offer stipends as an employee benefit because they provide flexibility, allowing employees to use their allowance to best suit their individual needs. Instead of an employer selecting a one-size-fits-all benefit, stipends empower employees with more control over how they use their benefit funds.

Do you have to pay taxes on stipends?

Like regular direct compensation, the IRS considers many stipends taxable income. You may also be responsible for any payroll taxes associated with this extra income. Any stipend amount you pay out to employees should be reflected as an extra line item on your employees’ paychecks².

Generally, the IRS also requires employers to withhold Social Security and Medicare taxes from employees' wages. Business owners must pay their share as well³.

Employees must pay federal income taxes on stipend money. Federal income tax calculations use 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 extra pay?

One reason employers may choose a stipend over a salary increase is because employees prefer it. According to SHRM, 88% of employees prefer jobs with better benefits and lower pay⁴.

Additionally, a 2024 PeopleKeep Benefits Survey found that 81% of employees say an employer's benefits package is an important factor when considering a job. Yet, 30% of employers don’t plan to update their benefits package in 2025.

A recent study⁵ also found that only 39% of employees believe their company’s benefits address their physical health. Providing your staff with health and wellness stipends is more crucial than ever in 2025.

With a stipend, you can provide your team with an employee benefit that’s more personalized and flexible than traditional, defined benefits options. For example, instead of selecting a single wellness benefit for all employees, you could offer a wellness stipend that allows each team member to spend the funds on what matters most to them.

Can you pay employees a stipend instead of a salary?

You can't offer a stipend to a regular worker instead of hourly wages or to a W-2 salaried employee. All U.S. employers must follow their state’s minimum wage requirements.

But there are situations where you may give stipends to workers who are ineligible for regular salaries. These are positions where the person benefits from the work more than the employer because the focus is mainly on learning.

The following are common types of stipend recipients⁶:

• Researchers
• Graduate students
• Interns
• Apprentices
• Fellowships
• Clergy
• Job trainees

Stipends don’t replace annual salary increases for long-term employees. But, they can be leveraged as an employee fringe benefit in lieu of traditional options. They can help financially support your staff while helping you shine in a competitive job market.

What are the differences between stipends and salary increases?

While stipends and wage increases provide extra compensation to employees, they work differently. Below, we’ll discuss the three main differences between a stipend and a raise.

1. Optional reimbursement model

While most employee stipends are like bonuses or regular payments, many businesses offer them as reimbursements. In this case, employers only pay the stipend when an employee incurs an eligible expense.

Instead of receiving extra money upfront, your employees request reimbursement for qualified expenses as they incur them. You can choose how much of a monthly allowance to offer. Your employees can request reimbursement up to that amount each month. After reviewing the expense, you can approve the costs for reimbursement up to their allowance amount.

The reimbursement method also saves you money if your employees only use part of their allowance. Unlike regular compensation, where the entire amount goes out with each paycheck, you get back some of the funds you set aside for stipend payments at the end of the month or year.

2. You can offer different types of benefits to certain employee classes

Another difference between salary increases and stipends is that stipends can cover a wide range of benefits at different allowance amounts. You can also vary the benefits and allowances by employee classes.

Suppose you have full-time and part-time workers. You also have employees who work remotely in different states than your business’s physical location. In this case, you can categorize your employees into groups to customize your stipend.

You can 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.

You can’t use employee classes to single out or prevent a particular employee from receiving a benefit. But you can use classes to determine stipend eligibility. For example, you can choose only to offer a stipend to full-time employees.

Using employee classes provides a more personalized way to administer stipends to your diverse workforce.

3. Stipends are fixed allowances that occur at regular intervals

Bonuses and salary increases are usually performance-based or vary depending on the rising cost of living. But, employers can award employees a stipend regularly. Stipend amounts stay the same throughout the year, and employees decide if and when they want to use them.

Bonuses are typically between 2.5% and 7.5% of an employee’s regular wages. Some even range as high as 15%⁷. In contrast, stipend allowances are the same for all employees of the same class. This means businesses have control over how much money they offer their employees. So, any budget is workable.

Stipend vs. salary increase comparison chart

How a tax-advantaged HRA can support your employees' medical needs

If you want to offer your staff a tax-free benefit that offers just as much flexibility as a stipend, consider a health reimbursement arrangement (HRA). With an HRA, employers give their employees a monthly allowance that employees can use to pay for qualified medical expenses. Once your employees make an eligible purchase, you reimburse them tax-free for the cost.

An HRA lets you set a budget-friendly allowance. You can also decide what medical expenses to allow for reimbursement, like premiums only. Then, your employees buy the healthcare services and items they need. Depending on the HRA, your employees can even choose their own individual health plan.

PeopleKeep can help you administer three popular types of HRAs:

• The qualified small employer HRA (QSEHRA): This HRA is for employers with fewer than 50 full-time equivalent employees (FTEs) who don’t offer a group plan. While it has maximum contribution limits, it has no minimum limits. Employees must have a health plan with minimum essential coverage (MEC) to use the benefit.

1. The individual coverage HRA (ICHRA): The ICHRA works like the QSEHRA. But it’s for employers of all sizes, has no maximum contribution limits, and allows for customization using employee classes. Your staff must have a qualifying form of individual health insurance to participate.
2. The integrated HRA: This type of HRA integrates group health insurance. With an integrated HRA, organizations of all sizes can reimburse their employees for the out-of-pocket costs their employer-sponsored group health plan doesn’t fully cover. Like the ICHRA, it has no maximum limits and has employee class customization options. Only employees enrolled in your group plan can use the integrated HRA.

Conclusion

When determining how to update your compensation strategy, there are several options to choose from. While increasing pay may sound like a good choice, it might be wiser to instead offer a stipend to provide 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 personalized health benefits to your employees? If so, PeopleKeep can help! Our HRA administration software allows businesses of all sizes to manage flexible and customizable HRAs in just a few minutes per month. Get in touch with one of our HRA specialists to learn more!

This post was originally published on February 23, 2022. It was last updated on October 14, 2024.

1. NFP - Annual Employee Benefits Trend Report

2. IRS Publication 525

3. IRS Employment Taxes

4. SHRM - Aligning Benefits with Employees

5. Guardian - 2024 Mind, Body, and Wallet Report

6. Indeed - What is a Stipend?

7. Types of Bonuses