In general, under Internal Revenue Code Section 1441(a), all taxable payments to nonresident aliens are subject to U.S. reporting and withholding. The taxable amount of scholarship or fellowship payments made to a nonresident alien depends on the following factors:
Federal Income Tax Withholding & Reporting
Source of grant:
- U.S. source – Payer resides in the U.S and the educational activity was conducted in the U.S. (IRS Reg. Sec. 1.863-1(d)).
- Foreign source – Payer does not reside in the U.S. or educational activity was conducted outside the U.S.
- U.S. source grant – Subject to withholding and reporting.
- Foreign source grant – Not subject to withholding and reporting.
- Student enrolled in an undergraduate or graduate degree program at a college or University, or
- Student not pursuing a degree but merely attending an accredited educational institution which offers a Bachelor’s or higher degree (IRS Reg. Sec. 1.117-6(c)(4)).
- Qualified amounts – Payments for qualified expenses such as tuition and fees, course related books, supplies, equipment and other required course-related expenses, paid to a nonresident degree candidate are not taxable.
- Nonqualified amounts – Payments for nonqualified expenses such as room and board, travel and research expenses, paid to a nonresident degree candidate:
- Subject to 14% withholding if the recipient is an F, J, M or Q visa holder, unless a tax treaty exemption applies (see below).
- Subject to 30% withholding for all other visa holders (IRC Sec. 1441).
- Taxable amounts are reported on Form 1042-S.
Non-degree candidate or post-doctoral fellow
- In general, unless a tax treaty exemption applies (see below), the full amount of the scholarship or fellowship is subject to 30% federal income tax withholding and is reported on Form 1042-S.
- The withholding rate is 14% if the recipient is an F, J, M or Q visa holder and the following conditions apply:
- The grant is for study, training or research in the U.S.
- The grant is made by a tax-exempt organization, a foreign government, a federal, state or local government agency, an international organization or a cultural or educational organization created or continued under the Fulbright-Hays Act.
Tax treaty exemption applies
- A tax treaty may qualify the nonresident recipient for an income tax exemption or a reduced withholding rate.
- Complete record on GLACIER (see below) to determine tax residency, eligibility for tax treaty exemptions and applicable withholding rates.
- Taxable payments are reported on Form 1042-S.
Tax treaty exemption does not apply
- Taxable payments are subject to 30% withholding and are reported on Form 1042-S.
Compensation for services:
- Any part of the scholarship or fellowship that is payment for teaching, research or other services, required as a condition of receiving the grant, or which enables the recipient to pursue studies or research primarily for the benefit of the grantor.
- Unless the payment is exempt under a tax treaty, it is taxable as wages, subject to graduated withholding rates and reported on Form W-2.
- If the payment is exempt under a tax treaty, it is reported on Form 1042-S and also on Form W-2 for state tax purposes.
Tax Reporting – Grant Recipient
- Determining Tax Status – The grant recipient should complete his or her record on GLACIER (online nonresident alien tax compliance system) to determine tax residency status, applicable withholding rates and eligibility for tax treaty exemptions. Information on GLACIER is available on the Payroll Services website.
- Tax Forms – Payroll Services will notify the recipient of his or her tax status and issue the applicable tax forms:
- Form W-2 to report payments for services.
- Form 1042-S to report taxable non-wage payments.
GLACIER Tax Prep, a web-based tax preparation system designed for nonresident aliens, is available to assist with preparing Form 1040NR or Form 1040NR-EZ. Filers with a GLACIER record can use GLACIER Tax Prep for free. For more information, go to the GLACIER Tax Prep website.