Paid to study, or paid to work?
The threshold question that must be answered before a payment may be considered a non-taxable scholarship, fellowship or grant is this - is the student being paid to study or paid to work?
The answer to this question depends on each individual situation, but hinges on whether the student's activities are primarily to further the student's education and training, or whether the University is the primary beneficiary of the student's activities. Some key questions to ask are:
- Does the University control or direct the student's activities?
- Is the payment consideration for past, present or future services of the student?
- What are the benefits derived by both the student and the University as a result of the student's activities?
- Is the student doing work that an employee would be doing if the student was not?
The answers to these questions will determine the treatment of the payment. It may be all scholarship, fellowship or grant; all compensation for services; or some combination.
Nonresident Alien Recipients
Nonresident alien recipients of scholarships, fellowships or grants may be subject to federal income tax withholding on the portion that is taxable. The tax rate is generally 14%, but may be reduced under an income tax treaty. Contact the Payroll Department for further information.
Graduate Assistant Tuition Waivers
Under Internal Revenue Code Section 127, tuition waivers awarded to graduate assistants whose work duties are less than 50% devoted to researching and/or teaching are considered taxable income once the total tuition waiver amount exceeds $5,250 in a calendar year. This means that the value of tuition waiver exceeding $5,250 will be reported through payroll and subject to withholding taxes. Additional taxes will be withheld from stipend payments in the pay periods that taxable tuition waivers are reported based on the completed W-4 on file with the Payroll Office. The taxable income associated with the waiver (the amount that exceeds $5,250) and the taxes withheld with respect to such income are reported on Form W-2.
Both the amount of taxable income associated with the waiver (amount exceeding $5,250 in the calendar year) and the taxes that the University withholds with respect to such income are reported on Form W-2. The taxes that the University withholds are forwarded to the IRS and credited to your tax liability for the year.
Graduate Assistant Insurance Premium Payments
The payment of insurance premiums on behalf of a student is considered a taxable scholarship. A scholarship is an amount paid for or remitted to the student to aid the student in pursuing study or research. In order for a scholarship to be tax-free, it must be used to pay for qualified educational expenses, detailed below. The University reports tuition and related expenses, as well as scholarships, on Form 1098-T. The IRS provides guidance on the nature and taxability of scholarships in Chapter 1 of Publication 970. Additional information regarding the reporting of scholarships can be found in the Form 1098-T instructions.
Form 1098-T reports the total of all payments received for qualified tuition and related expenses in Box 2. Qualified tuition and related expenses are tuition, fees, and course materials required for a student to be enrolled at or attend an eligible educational institution. The following are not qualified tuition and related expenses.
- Amounts paid for any course or other education involving sports, games, or hobbies, unless the course or other education is part of the student’s degree program or is taken to acquire or improve job skills.
- Charges and fees for room, board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses.
Form 1098-T reports in Box 5 the total amount of any scholarships or grants paid to cover the student’s costs of attendance. The scholarships or grants included in this total are tax-free to the extent that they paid for qualified education expenses, which are expenses for:
- Tuition and fees required to enroll at or attend an eligible educational institution; and
- Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.
For more information on Scholarships and Fellowships, please review IRS Publication 970 at https://www.irs.gov/pub/irs-pdf/p970.pdf.
For more information regarding the documentation required for Scholarship payments, please review the University's general information and instructions for completing a payment to individuals for services and scholarships.