Federal Tax: Federal tax withholding requirements on non-qualified Scholarship and Fellowship payments are different for U.S. residents for tax purposes and nonresidents for tax purposes.
When issuing a payment to a Foreign National who is not a U.S. Permanent Resident, Refugee or on Asylum status, an individual’s residency status for tax purposes is determined by the GLACIER online tax reporting system and is administered by the Central Resource Unit.
Federal Tax Withholding for U.S. Residents
The IRS does not require academic institutions to withhold taxes on, or report Non-Qualified Scholarship Fellowship payments issued to U.S. Residents for Tax Purposes. It is important for U.S. Residents to be aware that Non-Qualified Scholarship Fellowship payments are considered to be tax reportable income. It is the individual taxpayer’s responsibility to be aware of their tax liability and schedule payments with the IRS accordingly.
Federal Tax Withholding for Nonresidents
The IRS requires academic institutions to report all Non-Qualified Scholarship and Fellowship payments issued to nonresidents for tax purposes on Form 1042-S. Tax withholding requirements per Internal Revenue Code (IRC) Section 1441, are as follows:
Non-Qualified Scholarship Fellowship payments issued to nonresidents for tax purposes, are subject to 30% federal withholding with the following exceptions;
- Under IRC section 1441 (b) a reduced rate of 14% is granted to F, J, M, and Q visa holders.
- Income that is exempt from Federal Withholding due to a Tax Treaty Exemption.
Tax Treaty Requirements
- There must be an existing tax treaty between the United States and the student’s country of residency.
- Student must be a nonresident for tax purposes.
- The primary purpose of the student’s visit to the United States must meet the requirements. Scholarship Fellowship income is covered by income code 15.
- The student must be paid the type of income covered in article of the tax treaty. Some tax treaties have student articles that cover different types of payments: compensation for services, scholarship/fellowship, and allowances from abroad.
- The student must meet the time and dollar constraints of the tax treaty article.
- GLACIER forms and documents must have been submitted, reviewed and approved by the Central Resource Uni.
Federal Tax Withholding rates, Tax Treaty eligibility and application are determined upon the Central Resource Unit’s review of the Scholarship Fellowship recipient’s GLACIER forms and documents.
State Tax Withholding
The California Franchise Tax Board (FTB) does not require the University to withhold California state tax from scholarship fellowship payments. However, it is important to note that Non-Qualified Scholarship-Fellowship payments are considered to be taxable income by the FTB.
- It is the individual taxpayer’s responsibility to be aware of their tax liability and to schedule payments to the Franchise Tax Board accordingly.
- The state of California does not recognize Federal Tax Treaties.