Policies and Procedures
Policy 1119 – Foreign National Scholarship/Fellowship Awardee
July 1, 2004
October 1, 2014
October 1, 2014
Director of Payroll Services
There is no tax withholding requirement on scholarship or fellowship payments made to U.S. citizens or resident aliens; however, certain amounts of the scholarship or fellowship grant (for example, room, board, and travel) may be subject to U.S. income tax.
Nonresident alien students may be subject to federal income tax withholding on the taxable portion of any scholarship/fellowship grant. They may claim exemption from withholding based on a U.S. tax treaty with the student's country of residence. Resident alien students may also qualify for tax treaty benefits with respect to the taxable portion of scholarship/fellowship amounts.
Nonresident alien students not able to use a tax treaty for withholding exemption will have tax withheld on scholarships and fellowships. For students with F, J, M, or Q visas, the withholding rate is 14%. For students with other visa types, the withholding rate is 30%. However, tax will be withheld only on the taxable portions of the scholarship/fellowship grant (generally room, board, and travel).
I. Financial Aid Awards
The tax withholding regulations apply to scholarships and fellowships provided to nonresident alien students regardless of the method of payment. Awards provided by University check, aid directly credited to the student's account as awarded by the Office of Scholarships and Student Aid, tuition remissions credited to the student's account, aid paid by external organizations and credited to the student's account, and aid provided by other methods are subject to the tax withholding regulations. Postdoctoral trainees who receive financial aid by payroll check for tax withholding purposes and are nonresident aliens for tax purposes are also subject to these procedures.
II. Direct Credit to Student Accounts
Information on scholarships and fellowships that are directly credited to student accounts will be provided by the Cashier's Office to Payroll Services to ensure compliance with tax withholding and reporting regulations. If tax withholding is required, the credit transaction to the student's account will be reduced by the required withholding amount.
A nonresident alien student who wants to claim a withholding exemption based on a U.S. tax treaty with the student's country of residence should submit Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and the Official Attachment. Resident alien students claiming a tax treaty exemption should use Form W-9, Request for Taxpayer Identification Number and Certification and the Form W-9 Statement.
III. Payments by Check Requests
The Foreign National Information Form (PR-100) must be attached to check requests for scholarship or fellowship payments to a non-U.S. citizen, and the check request must indicate that the payment is for a graduate award.
IV. Postdoctoral Trainees
ConnectCarolina’s HR/Payroll module is used to authorize and process non-service financial aid for postdoctoral trainees. Also, Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and the Official Attachment, should be attached if tax treaty benefits are being claimed by a nonresident alien under a student/trainee tax treaty provision. Resident alien postdoctoral trainees claiming a tax treaty exemption should use Form W-9, Request for Taxpayer Identification Number and Certification.
Scholarship and fellowship grants to nonresident alien students may be subject to federal income tax withholding based on the student's visa type and degree path, as well as the existence (or not) of a U.S. tax treaty with the student's country of residence. The federal income tax withholding rate may be 0%, 14%, or 30%, depending on the circumstances, and the tax rate may apply to only a portion of the total financial aid awarded.
V. Federal Withholding
Federal withholding may also be based on whether the scholarship/fellowship grant payment constitutes U.S.-source income. Generally speaking, if the grant is classified as "foreign-source," it will not be subject to U.S. tax and federal income tax withholding. The source is determined by a "residence of the payer" test. Under this test, if the foreign national grantee receives the scholarship or fellowship from a non-U.S. person or entity, the grant will be foreign-source (and nontaxable) even if the grantee conducts the scholarship/fellowship activities in the U.S. Conversely, if the grantee receives the award from a U.S. person or entity, the payment is treated as U.S.-source income, regardless of where the educational activities take place.
VI. Determining Residence of Payer
In determining the residence of the payer, the sourcing conclusion is not affected if payments are made by intermediary agency acting on behalf of the payer. A genuine agency relationship must exist, however, between the payer and the intermediary. Thus, for example, if the government of Spain funds scholarships for Spanish students to study in the U.S. and contracts with a U.S. organization to administer these grants, the payments would be treated as foreign-source income because the true payer is a foreign entity, with the U.S. organization simply acting as an agent.
The tax regulations apply regardless of the payment method used. Scholarships, fellowships, and other financial aid are paid using several methods:
- The Office of Scholarships and Student Aid processes undergraduate awards through the Student Information System as credits to student accounts in the Cashier's Office.
- Departments initiate Campus Vouchers for graduate awards. Campus Vouchers should not be used for undergraduate awards.
- Student account credits are processed by the Cashier's Office for tuition remissions and payments by external organizations.
- All undergraduate scholarships must be disbursed through the Office of Scholarships and Student Aid. Scholarships to foreign nationals will be credited to the student's account in the Cashier's Office if there is no tax withholding requirement. Awards requiring tax withholding will be identified by the Office of Scholarships and Student Aid and processed by Payroll Services.
Reason for Policy
The purpose of this policy is to provide information regarding tax withholding for foreign nationals receiving scholarship and fellowship assistance.
Scholarship/Fellowship Grants to Foreign National Grantees
If the foreign national grantee is classified as a resident alien, no amount of the scholarship/fellowship grant is required to be reported to the IRS or the grantee on Form 1042-S. Such grantees should realize, however, that the taxable portions of these grants (generally room, board, and travel) may be treated as taxable income to them.
With respect to scholarship/fellowship grants made to nonresident aliens, the nontaxable portions of any such grants (generally, tuition, fees, and books, and grants treated as foreign-source) are not required to be reported to the IRS or the grantee on Form 1042-S. The University, however, is required to report the amount of any scholarship/fellowship grant excluded under a tax treaty and the taxable portion of any U.S.-source scholarship/fellowship grants to both the IRS as well as the grantee on Form 1042-S.
- 1119.1 - Completing Tax Withholding Forms as a Foreign National Scholarship/Fellowship Awardee
Frequently Asked Questions
October 1, 2014: Updated system and campus voucher information.
August 24, 2009
January 3, 2005