Prizes and Awards

Prizes paid by universities and other organizations devoted to the propagation of the arts and sciences generally fall into two broad categories. The intent of the grantor and the circumstances surrounding the payment of the grant determine the essential nature of the grant, and whether the grant falls into category 1 or 2.

1. Prizes, which are in the nature of a scholarship or fellowship
2. Prizes, which are NOT in the nature of a scholarship or fellowship
   
   • Prizes that involve a payment in the nature of an award or recognition for some sort of special achievement, special skill, special knowledge, or special renown in a certain area, or can represent an award won in a contest of some sort. (Examples of prizes in category 2 would be a prize paid for winning a piano competition, a prize paid to a figure of world renown for his outstanding achievements in a certain area of research or politics, or a prize paid for winning some sort of contest.)
   • When paying a prize in category 2, the grantor does not specifically intend that the grantee spend the prize amount "for the purpose of aiding his study, training, or research", but instead intends the prize to be an award which recognizes the achievement or renown of the grantee and which may be spent in any fashion the grantee sees fit.
   • If the prize paid to a nonresident alien falls into category 2, then the grantor would treat it as being "fixed, determinable, annual, or periodical income" (FDAP income), which is income which is not effectively connected with the conduct of a U.S. trade or business.

Payment Procedures:

1. Determine if the payment is to a vendor and not an employee
2. Determine if the payment to the prospective NRA is allowable
3. The host department must collect the necessary documentation -- contact Nancy Colón for assistance
4. All documentation and the check request must be submitted to the Office of International Taxation for approval
5. Because awards are sourced in the country of the payor's residence, they are subject to federal withholding tax of 30%.
6. The prize or award will be reported on 1042 and 1042-S. (Classified as Income Code 50.)

Prize vs. Scholarship

If the awarded money can be used in any way that the recipient pleases, it is not a scholarship or fellowship. Therefore it is subject to 30% NRA withholding rather than 14% if the recipient is an NRA. The personal exemption can't be used to offset a prize. The offset only applies to scholarship and fellowship grants of recipients in F, J, M, or Q status.

Caveats about prizes in category two:

• They are entirely includible in the gross income of the recipient.
• Except, when they are excluded from gross income amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if:
  • the recipient was selected without any action on his part to enter the contest or proceeding
  • the recipient is not required to render substantial future services as a condition to receiving the prize or award
  • the prize or award is transferred by the payor to a governmental unit or organization pursuant to a designation made by the recipient
• If all 3 conditions named above are not met with respect to the category 2 prize, then it is fully taxable, and if paid to a nonresident alien, fully reportable on form 1042-S and subject to 30% withholding.

Tax treaties:

Usually tax treaties do not contain separate articles exempting prizes and awards from taxation. However, some treaties contain provisions about "other income" (i.e., income not mentioned by any other article of the treaty). In some treaties, such "other income" is exempted from U.S. taxation. Thus, it is possible in the case of some tax treaties that a category 2 prize might be exempt from U.S. taxes under the "other income" article of the treaty. If this were true, then the NRA recipient would file form W-8BEN with the payor institution to invoke his treaty benefit, and such institution would report the prize income on form 1042-S without withholding any tax.

Gifts:

Under IRS rules, outright gifts (including money for education) are not income for federal income tax purposes. There is no withholding or reporting on true gifts. They do not have to be recorded on a tax return. Gifts may be subject to a gift tax, but this tax would be the obligation of the donor of the gift. Caution should be taken with treating a scholarship type gift as a gift rather than a scholarship.

Academic Merit / Achievement Award:

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.