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Payments to Non-Resident Aliens: Scholarship/Fellowship Income

A scholarship is defined as an amount paid or allotted to an individual, for the benefit of a student, whether an undergraduate or graduate, to aid such individual in pursuing his/her studies.

A fellowship is defined as an amount paid or allotted to an individual, for the benefit of an individual to aid him/her in the pursuit of study or research.

These payments help the individual to cover the cost of tuition, fees, books, supplies, travel and/or living expenses while at Auburn University.

In order for a payment to qualify as Scholarship or Fellowship income, there must be no requirement that the individual perform services to receive the payment. If there is such a requirement then the payment is considered wage compensation and must be paid through payroll.

In general, scholarship and fellowship payments made to a Non-Resident Alien individual are taxable and reportable.

For additional information refer to IRS publication 515.

Tax Withholding

Federal Income Tax
Scholarships/Fellowships for taxation purposes are broken into two categories: Qualified and Non-Qualified. Internal Revenue Code Section 117 states that Qualified scholarship/fellowship payments are not included in the student’s income for federal tax purposes and are not subject to federal income tax withholding.

Qualified Scholarships are defined as that portion of the scholarship used for:

  • Tuition and fees required for enrollment or attendance, or
  • Fees, books, supplies and equipment required for courses of instruction

Non-Qualified Scholarships/Fellowships are included in income and are subject to federal income tax withholding. Examples are:

  • Room, board, travel
  • Student health and pharmacy charges
  • Amounts paid for living expenses (no services required)

Section 1414 (b) provides that for payments made to Non-resident aliens in the form of a scholarship/fellowship the standard 30% tax withholding rate is reduced to 14% if the following conditions are met:

  • the Non-Resident Alien is temporarily in the U.S. in F, J, M or Q status
  • the recipient must be a “Candidate for a Degree”- present for studying, training or research.

The recipient may also qualify for exemption from taxes on the Non-Qualified portion of the scholarship/fellowship if a tax treaty applies. If that is the case then the individual will complete a W-8 BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. The individual must possess a U.S. issued Social Security Number or Individual Tax Identification number before treaty benefits will be given.

Only Non-Qualified Scholarships/Fellowships are reportable. A 1042-S tax form will be sent to the recipient following the end of the tax year.