student tax query

jctheimpaler

I have a query which I'm hoping somebody here can resolve for me.

I am currently a full-time third level student and my student stipend is exempt from tax. I'm currently involved in a start-up company that makes no money but is starting to look like it might become profitable (fingers crossed!). The company's plan is to pay all employees a basic salary whenever it has the money to do so. So my question is, how would this affect my tax situation? The scholarship exemption form doesn't appear to prohibit alternative sources of income. How would I be taxed for the income from the company? If, for example, I am currently receiving €18K p.a. as a student stipend and I was to begin receiving €20K p.a. from this company, would my tax free allowance be significantly reduced or superseded by my scholarship exemption? If the scholarship is exempt from tax, does it still contribute towards placing me in a higher tax bracket?

I hope I have made my situation clear here! I suppose, at the most basic level, my question is: If I earn 38K p.a. and 18K of it is exempt from tax, how much tax am I expected to pay?

Mr. Incognito

Okay......... Lets break this down

The Company element:

Firtstly if you incorporate a company, it has nothing whatsoever to do with your own tax credits. It will be liable to corportion tax at 12.5% and you will be oblidged to file returns. It will be required to have it's own bank account, and traceable monies. You cannot "mix" your own cash and the companies. If you intend paying individuals on an ad hoc basis they would likely be held to be self employed individuals as opposed to "employees" of the company. If they were held to be employees you would be oblidged to operate employers PRSI and PAYE whereas for self employed indivduals the onus is on them to self declare and self account for this income.

Personal element.

A common misconception among students is that they can earn income tax free. This is incorrect. What is happening is that the income is covered by their tax credits and the net result is a nil tax position. Just because you pay no tax does not mean that you are exempt per se.

if you do not incorporate the company this income will be seen as self employed case 1 income and your tax is will be calculated as follows.

grant 18K

Case 1 20 K
Less case 1 expenses ?

Assessable income 38,000

Applying rates for 2007 (off the top of my head don't know the 08 rates -you can look them up)

34,000@20% 6,800
4,000 @41% 1,640

taxable Income 8,440

less tax credits

personal credit 1,760
(no paye paid so no paye credit)

net tax 6,680

of course this is just a rough example but you get the idea.

Legend100

For once he actually is in the category of "students don't pay tax" Setanta. Stipends are exempt under Section 193 of the 97 Act. This myth that students don't pay tax otherwise will continue forever but he is one of the very rare cases where it does apply. But I was of the opinion that stipends were only tax exempt when you are certified as being in "full-time" education. Since there will be an external source of income then I would not be sure if the exemption would still be granted as technically you would move from full-time to part-time but I would think you could argue your case here.

If it was allowed, your standard band would not be affected and you would only be taxed up to 38000 ( I think that is the 08 rate but might be wrong) on your case 1 assessable profits at 20% and deducted by your personal credit as Setanta said.

Hope that was some help

jctheimpaler

Thanks for the replies. Very informative.

Setanta, I think the company thing was probably unnecessary information on my part. I think that I would be considered as an employee of the company (as well as owning a portion of it) and would be drawing a fixed salary, unrelated to the company's income. So I suppose it would be no different than if I was being paid a salary as a part time worker in any other company that I have no shares in.

And Legend is right, my student stipend is tax-exempt. I must say I feel a wee bit patronised by the idea that I mistakenly think I don't have to pay tax! I have actually had "real" jobs and have paid tax on various full-time jobs I have had in the past, but I have now returned to college to do a PhD and I draw a modest, tax-exempt stipend. I'm fully aware of the fact that the only reason students don't generally pay tax is because they generally have to resort to low-paid, menial work and they can't earn enough to be liable for tax.

I'm interested in the idea that I would lose my exemption because of the extra source of income. I am still a full-time student. I am obliged to put in my 40 hours of research a week or I lose my stipend. All the work I have done for the company has been on a part-time basis (I don't sleep much!), so I think I would consider any income from the company as part-time income. Essentially, it would be like any other student part-time job, except it actually requires some level of competence and I get paid a decent wage...

So am I right in thinking that, as far as "The Man" is concerned, my stipend doesn't exist (because it is exempt), and he would only see my hypothetical €20K wage from my company as taxable income?

Legend100

Apologies JC if it sounded patronising, it was just because you wouldn't believe how many students come onto the boards giving out about being taxed and that they should never have to while being a student. I really would love to know who started this myth but thats a rant for another day.

Right, to your Q - Since you are an employee and you have shares your tax status will be affected if you are a director since your shareholding may give you a proprietary status (if you hold more than 15% of share capital) but if you are not a director then it will not affect you.

You should now only be taxed on the salary you receive from the company but you may want to get confirmation from the Revenue, I had a look again at Section 193 of the Act and it does seem to indicate that your stipend would not contribute to taxable income.

"(2) Income arising from a scholarship held by a person receiving full-time instruction at a university, college, school or other educational establishment shall be exempt from income tax, and no account shall be taken of any such income in computing the amount of income for the purposes of the Income Tax Acts."

Whether you have to declare the income from the stipend or not i'm not sure. But since I assumed you would have agreed to the stipend tax exempt declaration when you started, the Revenue should know you are taking it anyway.

Hope I answered the Question somewhat!

jctheimpaler

I have indeed declared my stipend. They have a scholarship exemption form for the purpose.

And thanks for the reply. That's exactly the info I was looking for. Now hopefully this company will start making some cash and this whole thing won't have been a futile endeavour.

NaasMan

Legend100 wrote: »

Apologies JC if it sounded patronising, it was just because you wouldn't believe how many students come onto the boards giving out about being taxed and that they should never have to while being a student. I really would love to know who started this myth but thats a rant for another day.

Right, to your Q - Since you are an employee and you have shares your tax status will be affected if you are a director since your shareholding may give you a proprietary status (if you hold more than 15% of share capital) but if you are not a director then it will not affect you.

You should now only be taxed on the salary you receive from the company but you may want to get confirmation from the Revenue, I had a look again at Section 193 of the Act and it does seem to indicate that your stipend would not contribute to taxable income.

"(2) Income arising from a scholarship held by a person receiving full-time instruction at a university, college, school or other educational establishment shall be exempt from income tax, and no account shall be taken of any such income in computing the amount of income for the purposes of the Income Tax Acts."

Whether you have to declare the income from the stipend or not i'm not sure. But since I assumed you would have agreed to the stipend tax exempt declaration when you started, the Revenue should know you are taking it anyway.

Hope I answered the Question somewhat!

It would seem that you are in receipt of a tax exempt scholarship. On the basis that you meet the conditions to get this tax exemption, you would only be taxable on your salary from the company, and should be able to claim your tax credits against this income in the same way as any other student who has a part time job. You should also look into the PRSI treatment of your income from this company, as it would can show that you do not earn the income under a contact of employment, you may be able to quality from Class S PRSI if you are a shareholder/director. This would save the company 10.75% employers PRSI. This would have ever mean that you would limit your Social Welfare entitlements.