When you work an internship, you may do it for the experience, without pay. Or you might be paid as an employee or an independent contractor. If you work as an employee you will have federal income tax (and state income tax if applicable), social security and Medicare taxes withheld from your pay. You will receive a W-2 after the end of the year reporting your income and the tax withheld, and you may have to file a tax return, depending on your total income, and whether you can be claimed as a dependent, among other factors. It would generally be to your advantage to file a return if federal income tax was withheld because you may be able to claim a refund.
If you are paid as an independent contractor, you would receive a Form 1099-MISC. In this case you are considered self-employed and you would have to file a federal income tax return if your net earnings for the year are over $400. You would report your earnings on Schedule C or C-EZ and you could deduct the expenses directly related to your work.
You would also have to pay self-employment tax on your earnings, which is the equivalent of social security and Medicare taxes that apply to independent contractors. The self-employment tax applies on 92.35% of your net earnings and the tax rate is 15.3% (for 2013), which is 12.4% for social security and 2.9% for Medicare. This tax is reported on Schedule SE. You can deduct the employer-equivalent portion of the self-employment tax on line 27 of Form 1040 or 1040NR.
If you are a student and you are doing an internship at the college or university as part of your course of studies, your earnings would not be subject to social security and Medicare taxes. This would include foreign students in the U.S. But internships by postdoctoral students or fellows, and medical internships would generally not qualify for the exclusion from FICA tax.
If you are paid for the internship as an employee, you could claim an itemized deduction for unreimbursed employee expenses on Schedule A of Form 1040 for the expenses you incur that are directly related to your internship work. These expenses are deductible to the extent they exceed 2% of your adjusted gross income. And your total itemized expenses would have to be more than the standard deduction in order to gain any tax benefit. To claim unreimbursed employee expenses you would also have to complete Form 2106 or 2106-EZ.
If you are paid as an independent contractor, you could deduct the ordinary and necessary expenses related to your internship work on Schedule C or C-EZ.
If you are not paid for the internship work, you may be able to claim an itemized deduction for the expenses as work-related education expenses. But according to the IRS you could not claim this deduction if the internship is part of a program that will qualify you for a new trade or business, or to meet the minimal educational requirements of your trade or business.
Transportation expenses to your internship job would generally not be deductible if they are considered commuting expenses. But you may be able to claim transportation expenses if you go to your internship from another job. If you must travel out of town for your internship, you may be able to deduct travel, lodging and meal expenses if you have established a tax home and are temporarily away from home to do the internship. IRS Publication 463 provides information on travel expenses.
FICA – IRS Student Guidelines, University of Minnesota
Foreign Student Liability for Social Security and Medicare Taxes, IRS
Internal Revenue Bulletin: 2005-2, IRS
Publication 463, Travel, Entertainment, Gift, and Car Expenses, IRS
Topic 513 – Educational Expenses, IRS
Topic 554 – Self-Employment Tax, IRS