Q&A: Taxes on grant money

November 21, 2008

I have been awarded a grant designed to recruit new physicians to underserved areas in my state. Is this money subject to taxes?

Q: I have been awarded a grant designed to recruit new physicians to underserved areas in my state by providing money for the first four years in practice. My accountant says that this is taxable income because I work for it. The state's rural recruiting organization feels that it should not be considered taxable income, but, of course, they told me to consult with my accountant. Do you have any idea?

A: The old saying that there is no such thing as a free lunch applies here. The IRS will consider the grant income, so you'd better do the same. The bigger question here is not whether the grant is subject to income taxes, but whether it would also be subject to Social Security tax. The IRS has gotten very aggressive in recent years in trying to collect Social Security taxes. Adding the Social Security tax would greatly increase your tax bill associated with this grant. One possible way of avoiding Social Security tax is to include the grant money as "other income," which is not subject to the tax.