Scholarships and Awards

[Reviewed 2/6/2024]

This page accessible via http://bit.ly/isstaxscholarships

Prizes and Awards

A brief note about Student Prizes and Awards which are NOT in the nature of a scholarship or fellowship, that is not "for the purpose of aiding study, training, or research" are "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. These amounts are taxable, reported to the nonresident alien recipient on IRS 1042-S, and withheld at the rate of 30%. The nonresident alien should investigate whether there is a treaty benefit that may exempt some or all of the prize/award. If so, the recipient can claim that treaty benefit on IRS W8-BEN, part II. See more complete information at University of Richmond and University of Washington.  See IRS Pub 515, "Withholding of Tax on Nonresident Aliens and Foreign Entities," regarding "Other Grants, Prizes, and Awards Subject to Chapter 3 Withholding," pages 33-34

Scholarships, Grants, Fellowships, Etc

The following information is taken from IRS Pub 515 (2021) "Withholding of Tax on Nonresident Aliens and Foreign Entities," pages 32-34. At the IRS web page for IRS Pub 515, search for "Scholarships and Fellowship Grants" to verify information quoted below.

The information quoted below refers to payments received from sources within the U.S. and may not apply to payments received from sources outside the U.S.

[NOTES inserted in square brackets are my clarifying comments.]

For purposes of the discussion below "scholarship" also refers to "grants," "stipends" etc.

Issues

Treaty Benefits and Taxable Portions of Scholarships

Some F or J visa nonresident alien students may have treaty benefits that exempt a portion of the taxable part of the scholarship from withholding and tax. See IRS Pub 4011, "Countries with Treaty Benefits for Scholarship or Fellowship Grants (Income Code 16)" for a summary list of countries, their benefits and treaty article. The treaty benefit only applies to "Non-Compensatory Scholarships and Fellowship Grants." Compensatory "scholarships" are not eligible for treaty benefits.

Non-Compensatory Scholarships and Fellowship Grants

Definition: "A scholarship or fellowship grant is an amount given to an individual for study, training, or research, and which does not constitute compensation for personal services." IRS Pub 515 (2021) Page 33, Column 1

Candidates for a Degree

[NOTE: Amounts of the scholarship could be qualified or non-qualified depending upon how that portion of the scholarship is used.]

"Qualified" Scholarships - not taxable and not subject to withholding

"Candidate for a degree. 

Do not withhold on a qualified scholarship from U.S. sources granted and paid to a candidate for a degree. A qualified scholarship means any amount paid to an individual as a scholarship or fellowship grant to the extent that, in accordance with the conditions of the grant, the amount is to be used for the following expenses.

The payment of a qualified scholarship to a nonresident alien is not reportable [that is, it is not reported to the IRS and recipient on a form such as a 1042-S] and is not subject to withholding [that is, withholding a percentage for federal and, perhaps, state tax liability]"

IRS Pub 515 (2021) Page 33, Column 1

[See https://www.irs.gov/newsroom/tax-benefits-for-education-information-center, section Scholarships and Fellowships, Qualified Education Expenses and Expenses that Don’t Qualify]

Not "Qualified" Scholarships - taxable and subject to withholding

"Not Qualified Scholarships" is the amount of the scholarship which is not used for tuition, fees, books, supplies, and equipment [see above] for enrollment in the school or courses.

"However, the part of a scholarship or fellowship paid to a nonresident alien which does not constitute a qualified scholarship is reportable on Form 1042-S and is subject to  withholding.  For example, those parts of a scholarship devoted to travel, room, and board are subject to withholding and are reported on Form 1042-S. The withholding rate is 14% on taxable scholarship  and  fellowship grants paid to  nonresident  aliens  temporarily present in the United States in “F,” “J,” “M,” or “Q”  nonimmigrant  status." 

IRS Pub 515 (2021) Page 33, Column 1 & 2

Nondegree Candidates

If the person receiving the scholarship or fellowship grant is not a candidate for a degree and is present in the United States in "F," "J," "M," or "Q" nonimmigrant status, you [the source of the funds] must withhold tax at 14% on the total amount of the grant that is from U.S. sources if the following requirements are met.

If the grant does not meet both (1) and (2) above, you must withhold at 30% on the amount of the grant that is from U.S. sources.

Alternate withholding procedure.

[NOTE: if a portion of the scholarship is subject to withholding, the payer may choose to treat that portion of the scholarship as wages. "You" in the paragraphs following refer to the payer, that is the university, college, or other source of the funds.]

"You may choose to treat the taxable part of a U.S. source grant or scholarship as wages. The student or grantee must have been admitted into the United States on an “F,” “J,” “M,” or “Q” visa. The student or grantee will know that you are using this alternate withholding procedure when you ask for a Form W-4."

IRS Pub 515 (2021) Page 33, Column 2

"After receipt and acceptance of the Form W-4, the payer must withhold at the graduated rates in Pub. 15-T as if the grant or scholarship income were wages."

IRS Pub 515 (2021) Page 33, Column 3

Compensatory "Scholarships and Fellowship Grants"

Definition: " . . . an amount given to an individual for study, training, or research" . . . that is compensation for teaching, doing research, and carrying out other part-time employment required as a condition" for receiving the funds. 

"Grants given to students, trainees, or researchers which require the performance of personal services as a necessary condition for disbursing the grant do not qualify as scholarship or fellowship grants. Instead, they are compensation for personal services considered to be wages. It does not matter what term is used to describe the grant (for example, stipend, scholarship, fellowship, etc.)."

IRS Pub 515 (2021) Page 33, Column 3

[NOTE: this is a caution for those payers, for example universities, colleges or scholarship agencies required to withhold]

Withholding agents who pay grants that are in fact wages must report such grants on Forms 941 and W-2 and withhold income tax on them at the graduated rates. Withholding agents may not allow tax treaty exemptions that apply to scholarships and fellowships to be applied to grants that are really wages. It is the responsibility of the withholding agent to determine whether a grant is "wages" or a "scholarship or fellowship," and to report and withhold on the grant accordingly. An alien student, trainee, or researcher may not claim a scholarship or fellowship treaty exemption against income that has been reported to him or her on Form W-2 as wages.

IRS Pub 515 (2021) Page 33, Column 3

Pay for services rendered

"Pay for services rendered as an employee by an alien who also is the recipient of a scholarship or fellowship grant usually is subject to graduated withholding under chapter 3 according to the rules discussed later in Wages Paid to Employees— Graduated Withholding. [IRS Pub 515 (2021), page 35, Column 2] This includes taxable amounts an individual who is a candidate for a degree receives for teaching, doing research, and carrying out other part-time employment required as a condition for receiving the scholarship or fellowship grant (that is, compensatory scholarship or fellowship income)."

IRS Pub 515 (2021) Page 33, Column 3