As summer approaches, many businesses are gearing up to welcome interns into their organizations. While summer internship programs can provide valuable assistance and fresh perspectives to your company—and meaningful experience for the interns themselves—they also come with specific payroll and tax obligations that require careful attention. At Diamond & Associates, we want to ensure your business remains compliant while providing valuable opportunities to the next generation of professionals.

Understanding the Different Types of Internships

Before diving into payroll specifics, it’s essential to understand the distinction between paid and unpaid internships, as this classification significantly impacts your tax and payroll responsibilities.

Paid Internships

Paid internships are straightforward from a classification standpoint: interns receive compensation for their work and are generally treated as temporary employees. Most summer internships fall into this category, and employers must handle all standard payroll and tax requirements accordingly.

Unpaid Internships

The Department of Labor has established strict criteria for unpaid internships in for-profit settings through what’s known as the “primary beneficiary test.” This test evaluates whether an intern can legally be unpaid based on several important factors. The internship must provide training similar to an educational environment and primarily benefit the intern rather than the company. Additionally, unpaid interns cannot displace regular employees, and the employer should derive no immediate advantage from the intern’s activities. There should be no guarantee of employment following the internship, and both parties must clearly understand the intern isn’t entitled to wages. Unless your internship program clearly satisfies these requirements, you should classify your interns as paid employees to avoid potential legal issues.

Payroll Considerations for Summer Interns

Employee Classification

Generally, paid interns should be classified as W-2 employees rather than 1099 independent contractors. This distinction is crucial for several reasons. Interns typically work under your direct supervision, with your company controlling their schedules and workload. They use your company’s equipment and resources, and the working relationship is temporary by design. All these factors point to proper classification as employees rather than contractors. Misclassifying interns as independent contractors can result in significant penalties, including back taxes, interest, and potential legal action.

Tax Withholding Requirements

As with regular employees, employers must withhold federal income tax from interns’ paychecks based on their completed W-4 forms. However, there are some nuances worth noting. Some students working for the school they attend may qualify for a Student FICA Exemption from Social Security and Medicare taxes under certain conditions. It’s important to understand that interns working only during summer break don’t automatically qualify for FICA exemption unless they meet specific criteria related to their educational institution. Most summer interns will be subject to standard FICA withholding, with employers responsible for matching these contributions.

State and Local Tax Considerations

Don’t forget about state and local tax obligations, which can vary significantly depending on your location. These include state income tax withholding where applicable, state unemployment insurance contributions, local income taxes in certain municipalities, and workers’ compensation insurance requirements. For interns who temporarily relocate for their internship, you may need to navigate multi-state tax considerations if they maintain permanent residence in another state. This becomes particularly important for businesses with intern programs that attract students from across the country.

Compensation Strategies for Interns

Setting Appropriate Wage Rates

When determining compensation for summer interns, several key factors should guide your decision-making process. First and foremost, ensure intern pay meets or exceeds all federal, state, and local minimum wage requirements to maintain compliance. Research competitive rates for interns in your industry to offer compensation that will attract qualified candidates. Consider adjusting compensation based on the intern’s education level and relevant skills, particularly for graduate students or those with specialized technical abilities. Finally, balance fair compensation with your organization’s financial limitations to create a sustainable program that provides value to both parties.

Alternative Compensation Methods

While most internships offer hourly wages, alternative compensation arrangements might benefit both your organization and the interns. Fixed stipends for the internship period can simplify payroll processing and provide interns with predictable income. Project-based compensation tied to completion of specific deliverables can motivate performance and simulate real-world work environments. Some organizations offer educational benefits by covering costs of relevant certifications or training that enhance the intern’s professional development. For interns who relocate temporarily, housing assistance can be valuable, though it’s important to note this may have additional tax implications. Remember that any non-cash benefits may have their own tax considerations for both you and the intern.

Onboarding and Compliance Documentation

Required Tax Forms

Streamline your intern onboarding by preparing essential documentation well before your summer program begins. You’ll need Form W-4 for federal income tax withholding determinations and Form I-9 to verify employment eligibility. Don’t forget any state-specific tax forms required by your location, which vary considerably across jurisdictions. A direct deposit authorization form will enable efficient payment processing and reduce administrative burden. Having these forms ready before interns arrive will ensure a smooth start and proper tax compliance from day one.

Timing Considerations

Internships often follow academic calendars, which may not align with your standard payroll cycles, creating unique challenges for your accounting team. Develop protocols in advance for handling mid-cycle starts and ends, as most interns will begin and conclude their employment in the middle of standard pay periods. Research your state’s requirements for the timing of final paychecks, as many states have strict regulations about how quickly departing employees must be paid. For internships that cross calendar years, consider the year-end reporting implications and communicate clearly with interns about what tax documents they should expect to receive.

Special Considerations for International Interns

If your summer internship program includes international students, additional documentation and tax considerations apply:

Work Authorization

International students bring valuable diversity and global perspectives to your workplace, but they have specific documentation requirements that must be satisfied before they can begin working. Most international interns will need an F-1 visa with either Curricular Practical Training (CPT) or Optional Practical Training (OPT) authorization, depending on whether the internship relates directly to their academic program. Some visa categories require a valid Employment Authorization Document (EAD). All international interns will need a Social Security Number (SSN) for payroll processing, which sometimes requires additional lead time to obtain.

Tax Treaties

The United States maintains tax treaties with numerous countries that may exempt certain international students from federal income tax withholding, potentially reducing their tax burden and your withholding obligations. To claim these benefits, international interns should complete Form 8233 (Exemption From Withholding on Compensation for Independent Personal Services) and Form W-8BEN (Certificate of Foreign Status). Your payroll system must be configured to accommodate these treaty benefits appropriately. Even with treaty benefits in place, these interns will typically still receive a Form 1042-S at year-end documenting their U.S. source income rather than the standard W-2 form.

Best Practices for Intern Payroll Management

Clear Communication

Establish transparent compensation policies from the outset of your internship program to avoid confusion and build trust. Provide written offers detailing pay rates and schedules before interns accept positions, giving them clarity about their financial arrangements. During orientation, explain payroll timing and procedures thoroughly, covering when and how interns will receive payment. Many interns have limited experience with workplace compensation, so offer resources for tax-related questions specific to student workers, including information about potential education-related tax benefits they might qualify for.

Accurate Recordkeeping

Maintaining comprehensive records is essential not only for compliance but also for program evaluation. Keep detailed documentation of hours worked, which is especially important for hourly interns who may have variable schedules during the summer months. Track all compensation provided, including any non-cash benefits that might have tax implications. Preserve copies of tax forms and withholding elections for the required retention periods. Performance evaluations should be documented consistently, particularly when they justify pay differences between similar positions, to demonstrate compliance with equal pay regulations.

Planning for Program Growth

As your internship program evolves over successive summers, take a strategic approach to its management. Develop standardized pay scales that promote equity across departments while allowing for appropriate differentiation based on skills and responsibilities. Create efficient onboarding processes specific to temporary workers that recognize their unique status and needs. Establish clear written policies regarding overtime authorization, any paid time off provisions, and holiday pay considerations. As you evaluate the program’s success, consider budgeting for potential expansion to accommodate additional interns or extend the program to other seasons.

A successful summer internship program requires thoughtful planning beyond just the work assignments. By addressing payroll and tax considerations proactively, you create a professional experience that benefits both your organization and the interns. Properly classified and compensated interns are more likely to become enthusiastic ambassadors for your company—and potentially valuable future employees.

At Diamond & Associates, we specialize in helping businesses navigate the complexities of employment tax and payroll compliance. Contact us today to ensure your summer internship program meets all legal requirements while maximizing value for everyone involved.