Scholarships and Fellowships
The Office of International Taxation reviews scholarship and fellowship payments that are applied to NRA's student accounts to determine tax liability and possible treaty exemptions.
A scholarship is a payment made to, or for, the benefit of a student, either graduate or undergraduate, to aid the individual in his course of study.
A qualified scholarship is an amount received as a scholarship grant that covers tuition, fees (health insurance), books, supplies and equipment required for instruction at the education institution. Reporting not required on a 1042-S. Income Code 15, Exemption Code 2 (1042-S).
A nonqualified scholarship is an amount issued for any other purpose, including travel, room, board, research, etc. This amount is subject to 14% federal tax withholding. A tax treaty may apply that would make this exempt from taxes. Reporting required on a 1042 and 1042-S. Income Code 15, No exemption code (1042-S).
Treaty Exempt Scholarship
Reporting required on a 1042 and 1042-S. Use income code 15, exemption code 4 (1042-S).
A fellowship is a payment made to, or for, the benefit of an individual to aid in the pursuit of study or research. May be either wages or a noncompensatory fellowship. It is wages if services are required as a condition of the grant. It is noncompensatory if no services are required as a condition of receiving the grant.
Scholarship with a Service Requirement
Stipends, tuition waivers or financial aid that require performance of services in exchange for the financial aid are taxable as wages, are reportable to IRS, and are subject to the withholding rules. The grant is considered compensation and not a scholarship if services are required in kind.
- Reported on a W-2.
- F-1 and J-1s who are nonresident aliens are eligible for the NRA FICA exception.
- Other immigration categories and resident aliens are not exempt from FICA.
Travel Grants Regulations
Travel grants, reimbursements, and/or payments made in regards to a scholarship or fellowship are NOT covered under the IRS accountability rule and therefore are taxable to the recipient. All travel reimbursement receipts must be submitted with a check request form.
- With a Service Requirement:
- Travel grant is non-taxable and excludable from reporting.
- The IRS has ruled that this type of travel grant may follow the same accountability guidelines as reimbursements for U.S. citizens or resident aliens.
- Research collaboration between two schools
- Attending a conference to present a paper
- Without a Service Requirement:
- Travel grant is taxable and reportable.
- The accountable plan rules do not apply.
- The withholding on travel grants is either 14% or 30%, depending on visa type and recipient's student status.
- Attending a conference for one's own educational purpose
- Working on one's own course of study (i.e. dissertation or research paper)
Academic (Merit) Prizes and Awards
Academic prizes and awards are payments made to an NRA is subject to federal tax withholding. Tax treaties do not generally apply. Therefore, 30% of the prize or award payment will be withheld for federal taxes.If it is simply an academic merit award it is not compensation. Since it is being given in recognition of something that has already been done, and is not being given to assist in studies or research, it does not qualify as a scholarship or fellowship, but as a prize or award, instead.
If the payee is an NRA, withhold 30% and report on a 1042-S unless a tax treaty exemption applies. If the payee is an RA, request a W-9 and report it on a 1099-MISC if the 1099 reportable payments are $600 or more for the year. If the payee is an RA and does not provide a TIN on the W-9, do 28% backup withholding.
A research grant is a payment made to an NRA that can be used for research performed at other universities is paid by a check request submitted to the Accounts Payable office. The check request must be submitted with the Foreign National Information Form and the required copies of visa documentation.
Work performed in the U.S. is considered "U.S. sourced" and will be taxable. Work performed abroad is considered "foreign sourced" and will not be taxable. The Office of International Taxation will determine if a tax treaty is applicable.
Section 1441(c)(6) of the Internal Revenue Code provides that no withholding of Federal income tax is required on grants made to NRA students and trainees, which originate from funds provided by the U.S. Agency for International Development (USAID) to the extent that such grants consist of "amounts of per Diem for subsistence." Any amount of the grant that exceeds a reasonable amount dedicated to subsistence (food and lodging), or any amount of the grant that is dedicated to something other than subsistence, is subject to withholding of Federal income tax. A reasonable amount dedicated to subsistence is usually measured with reference to the U.S. Government per diem rates in effect with respect to each locality in the United States.
The entire grant is includible in the gross income of the recipient and is subject to withholding.
The IRS does not consider post-docs to be candidates for a degree for purposes of Section 117 qualified fellowship rules for tuition and related fees. Therefore, the fellowship would be nonqualified (i.e. taxable.) The grant is entirely includible in the gross income of the nonresident alien recipient and, as such, is subject to withholding.
Under IRS Notice 87-31, there is no withholding and reporting on taxable scholarships and fellowships paid to or on behalf of US citizens and resident aliens. That does not mean that the amounts are not subject to tax. The recipient is required to record the taxable grants on their Form 1040 tax return if their total income including the grants exceeds the threshold amount for tax return filing purposes.
Section 1441 regulations allow for the full personal exemption amount ($3400 in 2007) to offset a recipient's taxable scholarship as long as the recipient does not also have taxable wages. The regulations apply to recipients in F, J, M or Q status because other recipients are not allowed by the tax coed to treat their scholarships as effectively connected income taxable on a net basis (page 1 of From 1040NR and 1040NR-EZ.) Rather their taxable scholarships are taxed on a gross basis at 30% (page 4 of Form 1040NR.) Neither a TIN nor a W-4 are required for the personal exemption withholding allowance offset for taxable scholarships. The taxable scholarship recipients should submit a 1040NR-EZ so they should get the benefit of the personal exemption on their tax returns.
Foreign Sourced Funds
Funds that originate with a foreign grantor remain foreign sourced if UR is merely acting as the agent for distribution purposes. This is a matter of the law of agency. If the foreign grantor specifies who is to be given the funds and how much, and UR does not impose any of its own requirements on the disbursement decision, then they amount disbursed should be considered foreign source income. Document the original source of the funds, the instructions from the foreign grantor, and any other issues related to the disbursement.
Fellowship from an Outside Sponsor
If the individual is working for the semester, then the fellowship would be considered additional wages and UR would be considered the employer for payroll purposes if you are in control of the funds. If the sponsor is in control of the funds, they would have to comply with the payroll rules.
Students studying abroad for a semester who receive scholarship funding are considered to be receiving a foreign-sourced scholarship. The scholarship is not subject to IRS taxation and is not reportable.