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How is work-study income treated for tax purposes and on the FAFSA?

December 02, 2018

If you have a work-study job, it is considered as a form of need-based student aid designed to ease the financial burden of attending school. While the monetary benefits are clear, it is important to also understand the tax and financial aid ramifications associated with work-study income.

Do I Have to Pay Taxes on Work-Study Income?

The short answer is yes. Although federal work-study programs are technically a type of financial aid, work-study jobs allow you to earn wages instead of taking on debt. Since you are not required to spend your work-study wages on school-related expenses, the IRS views this income like any other job for the purposes of tax reporting.

While you are required to pay taxes on your work-study income, the good news is that many college expenses, such as tuition, student activity fees, and textbooks, are tax-deductible.

Is Work-Study Income Ever Tax-Exempt?

Rarely, but yes. In a few specific instances, work-study income is exempt from taxes. Work-study jobs with certain government agencies, nonprofit organizations, or specific types of health programs earn wages that are tax-free.

The National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship are two programs that specifically offer tax exemptions for work-study jobs. If you are majoring in a health-related field, these two programs are worth checking out.

What are the Benefits of Work-Study Jobs?

You may be wondering if there is any benefit to taking a work-study position, or if you should just try to find the highest paying part-time job possible. Aside from the considerable flexibility that most work-study jobs offer, the primary benefit is that work-study income does not reduce your eligibility for federal student aid. While you may be able to earn more money by working elsewhere, 50 percent of your non-work-study income above $6,660 will count against your eligibility to receive federal student funding.

Also, you do not have to pay to file taxes for your work-study job. The IRS provides a handy tax-filing tool that you can use for free.

How Does Work-Study Income Affect My Eligibility for Financial Aid?

The short answer is that it doesn’t. When completing the Free Application for Federal Student Aid (FAFSA) form, parents and students are required to report several different forms of common income, if applicable, including:

  • Employment income, except for work-study income;

  • Proceeds from asset sales, dividends, and capital gains;

  • Retirement fund withdrawals; and

  • Untaxed income, such as elective retirement fund contributions and money spent on a student’s expenses by friends or extended family members.

If you are considering taking a work-study job, it is crucial to understand the tax and financial aid implications. Although you will still have to pay taxes, earning work-study income will not reduce your eligibility to receive federal financial aid.