Scholarship and Fellowship Payments to Nonresident Aliens
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. A scholarship or fellowship grant paid to a nonresident alien (NRA) of the United States may or may not be subject to withholding and/or reporting on Form 1042-S. First, determine the source of the grant. If the grant is from foreign sources, no withholding or reporting is required. If the source of the income is from the United States, withholding and/or reporting may be required. Whether the scholarship or fellowship is subject to withholding depends on whether the recipient is a candidate for a degree or no degree and what the grant will be used for.
NOTE: Degree and nondegree candidates who receive payments representing compensation for teaching, research, or other services are considered to be employees; such payments paid through the Payroll/Personnel System are subject to Federal taxes and State tax withholdings. The IRS defines a degree candidate as an undergraduate or graduate student pursuing studies or conducting research to meet the requirements for an academic or professional degree.
- Resident aliens:
Scholarship and fellowship payments made to citizens or resident aliens who are degree or non-degree candidates are not subject to Federal income tax withholding or reporting. Undocumented individuals who meet the 183-day substantial presence test are classified as resident aliens for tax purposes. Therefore, scholarship or fellowship payments made to these individuals are not subject to federal tax withholding or reporting, provided it has been determined that they meet the 183-day test.
- Nonresident aliens - Candidate for a Degree.
Scholarship and fellowship payments made to undergraduate or graduate nonresident aliens are not subject to Federal income tax withholding and are NOT REPORTABLE on Form 1042-S if the payments are for tuition, fees, and course-related expenses (e.g., books, supplies, and equipment required for courses of instruction). This rule was effective as from January 1, 2001.
Incidental expenses for room and board, travel research, and other expenses not required for enrollment are subject to reporting on form 1042-S and are also subject to withholding of Federal income tax of 14 percent if present in the U.S. under an F (student), J (exchange visitor), M (vocational student), or Q immigration status. For all other nonresident aliens, tax is withheld at the rate of 30 percent on the amount of the grant.
Exclusion from Federal income tax withholding is allowed if the payment is excludable under a tax treaty (Click to see a list of tax treaty countries) based on the completed Certificate of Foreign Status for Federal Tax Withholding (UCW-8BEN) form obtained from the recipients through GLACIER Online Tax Compliance System. It is mandatory to complete the appropriate forms through the GLACIER system to claim the tax treaty benefits or the appropriate tax rate will be withheld automatically.
Note: The University of California, Riverside does not use the "alternate withholding procedure" for scholarships and fellowship grants; therefore nonresident aliens cannot claim exemptions on form W-4. Residents of Canada, Mexico, South Korea and a U.S. national (a citizen of American Samoa, or a Northern Mariana Islander who chose to become a U.S. national) cannot claim additional exemptions since form W-4 cannot be used for this purpose. The same thing applies to Residents of India who may be eligible for benefits under Article 21(2) of the United States -India income tax treaty.
The State of California only requires reporting and withholding on the portion of a scholarship or fellowship grant payment that represents payment for services. Generally, payment for services are paid through Payroll where state tax is wiithheld appropriately. Nonresidents of California are those who have not spent nine or more months in a tax year. Generally, an individual establishes residency in California after spending nine months or more in a tax year regardless of their country of origin. The State of California does not distinguish between U.S. citizens, residents and non-resident aliens.
TAX FILING REQUIREMENTS
If you received a U.S. salary during the year or a fellowship (for university fees and/or for a monthly stipend) you must file the appropriate federal (usually form 1040NREZ or 1040NR) and state tax forms (540NR). The forms you are required to complete may vary due to your individual tax circumstances and the amount of time you have been in the United States. Also, regardless of whether or not you have received income, nonresident aliens in F and J status and their dependents are required to file Form 8843 (see the GLACIER TAX PREP persons with no income handout attached above.). This Form is completed for informational purposes. For additional information, click here.