Tax Implications and Reporting Requirements of Payments to Nonresident Aliens
A fellowship payment received by a candidate for a degree, also called a “scholarship” payment by the IRS, is not taxable income to the student if it is used for "qualified expenses", i.e., tuition and required fees, books, supplies, and equipment required of all students in the course. These payments do not need to be reported to the student or to the IRS by the university.
A fellowship payment used for expenses other than qualified expenses is a taxable fellowship, also referred to as a stipend. Examples include payments used for living and incidental expenses such as room and board, travel, non-required books and personal computers, etc.
A taxable fellowship paid to a nonresident alien (NRA) with a “F-1”, “J-1”, “M-1”, or “Q-1” visa is subject to U.S. income tax withholding at a rate of 14% unless tax treaty relief is available. Currently, state taxes are not required to be withheld by the university even though the payments may be taxable in the state. This, however, is subject to changes in state legislation. A taxable fellowship is not subject to FICA withholding.
NRA students and scholars from countries that have a tax treaty with the U.S. that includes a scholarship/fellowship article may claim exemption or a reduction of tax withholding if they meet the requirements of the treaty and complete the required forms with the university's Tax Department.
The university reports stipend payments and the amount of federal tax withheld, if any, on Form 1042-S to the NRA student or scholar and to the IRS. NRA students and scholars are responsible for reporting these payments and remitting any tax due with their personal income tax return, e.g. Form 1040-NR and the corresponding state forms.
Payment Involving Services
Payments received in connection with the past, present or future performance of services by an NRA are taxable income, subject to federal and state income tax withholding by the university. Federal and state income taxes are withheld throughout the year based on the Form W-4, Employee’s Withholding Allowance Certificate, and the appropriate state payroll withholding form completed by the NRA. NRA students and scholars on F-1, J-1, M-1, or Q-1 status, who comply with the terms of their status, are exempt from FICA for certain periods. Once an NRA student becomes a resident alien, the general “student FICA” exemption may apply.
NRA students and scholars who receive payments that are not exempt from income tax withholding under a tax treaty will receive a Form W-2, Wage and Tax Statement, from the university. Form W-2 is also filed with the IRS.
NRA students and scholars from countries that have a tax treaty with the U.S. that includes a wage article may claim exemption or a reduction of income tax withholding if they meet the requirements of the treaty and complete the required forms with the university’s Tax Department. NRAs who had a portion of their payments exempted from withholding under a U.S. income tax treaty will receive Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for that portion of the payments. The income reported on Form 1042-S will not be duplicated on Form W-2. Form 1042-S is also filed with the IRS.
NRA students and scholars are responsible for reporting their exempt and taxable payments and remitting any tax due with their personal income tax return, e.g. Form 1040-NR and the corresponding state forms.