Memo
To: All Faculty and Staff
From: Susan Karavolas, Director of Human Resources
June McGrisken, Controller
Date: 8/8/02
Re: Policy on Support of Graduate Students
Background
The purpose of this memorandum is to ensure that the University is in compliance with Internal Revenue Service (IRS) rules concerning the support and taxability of graduate students, in particular non resident alien (NRA) students. This memorandum adds to earlier policies. The Federal Government, starting in the mid 1990’s, passed legislation and issued rules pertaining to non resident aliens. All colleges and universities are to be in compliance.
It is in the best interests of individual students and the University that all support arrangements of graduate education, especially for non resident aliens, be reduced to writing and that they be as detailed as possible. Individual students risk IRS fines and penalties should they not properly file income tax returns. The University risks IRS fines and penalties should it not correctly define the individual student’s relationship with the University.
Coverage
This policy primarily affects Research Fellows. Please note this policy does not affect Research Assistants or Post Docs. Individuals with these two titles continue to be employees of the University and will continue to be handled in the existing manner.
This policy clarifies the procedures and practices that are in effect for graduate student support beginning January 1, 2002.
Regulations Regarding Taxability
Support to graduate students consists of scholarships (tuition remission) and payments made directly to the students. These payments may cover education expenses, such as books and fees, and living expenses, for example. The payments may also be for services rendered.
Graduate tuition support is awarded from the following areas of the University: Admissions Office, academic departments, the Dean’s office, and individual principal investigators from research contracts and grants.
Current Federal laws make a distinction between qualified and non-qualified scholarships or fellowships.
Qualified Scholarships
Qualified scholarships or fellowships include tuition, enrollment fees, books, supplies and other reasonable education expenses. In general, these are not subject to withholding and taxation. The applicable federal law is the Internal Revenue Code (IRC) 117(b) which defines a “qualified scholarship” for purposes of this section as the following.
1. In general any amount received by an individual as a scholarship or fellowship grant is a qualified scholarship, to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.
2. ‘Qualified tuition and related expenses’ means the following.
a. tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii), and
b. fees, books, supplies, and equipment required for courses of instruction at such an educational organization.
Non-qualified Scholarships
Non-qualified scholarships or fellowships are subject to withholding and taxation. They include room and board, stipends, transportation and cash. Non-qualified scholarships or fellowships are subject to tax and withholding, unless a tax treaty between the United States and the Research Fellow’s home country applies. Within the tax treaties of individual countries, there must be a specific exemption for non-qualified types of scholarships or fellowships or for compensation.
Any award/payment for which there is a work obligation on the part of the student is fully taxable. In addition, payments to students to cover living expenses are taxable. Stipends are payments other than scholarships that have an element of service performed, i.e. teaching, research. Students currently perform research activities associated with their PhD studies that are charged to various Federal and state grants and contracts. The University is the withholding agent in these situations and the service is a condition for the receipt of the external funding.
Definitions
Internal Revenue Code (IRC) Section 117 (a) provides as a general rule that gross income does not include any amount received as a “qualified scholarship” by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(1)(A)(ii).
The University is required to comply with these federal regulations and, therefore, all awards will be subject to the following.
1. All awards of tuition remission for graduate students will be referred to as scholarships. Whether for partial or full tuition, no work obligation may be required for receipt of a scholarship. This amount is not taxable.
A portion of any additional award to a student (beyond tuition and fees) may be classified as an award towards educational expenses. This amount is paid directly to the student and is not taxable. For a full-time graduate student, an amount of up to $2,000/year may be awarded for this purpose. This represents the cost of books, computer equipment/ software and other educational supplies based upon the current estimate of educational costs used by the Financial Aid Office of the University. The student is responsible for establishing that the amount is used for qualified educational expenses.
Such awards may be made to part-time graduate students, but would be pro-rated based upon the number of credits taken.
No work obligation may be required for such an award. This type of award is not taxable under the Internal Revenue Code section cited above.
2. All payments/awards beyond “qualified scholarships” paid directly to the student for which there is a work obligation are fully taxable, and appropriate amounts will be withheld from paychecks.
Currently a research fellow may be awarded full graduate tuition and an annual payment of $10,000, for example. This same student would now be offered a scholarship covering tuition and an award/payment towards educational expenses of up to $2,000, and a payment of $8,000. For the most part a research fellow’s work obligation approximates 20 hours per week and is charged to a grant/contract. The student would be taxed on $8,000, subject to tax treaties with individual countries. This payment would be charged to account 5011 within the grant/contract.
If such students work for a department outside the fellowship program, they would have to be paid from the “student” or “work study student” lines of the departmental budget (accounts 5006 – regular student or 5007 – work study student). These payments are taxable.
3. Payments to students to cover living expenses are also taxable.
Administration of Graduate Support
Since there is a need within the University to more clearly define the components of graduate support to research fellows, a new procedure has been developed. This should provide a better understanding to students and the various departments within the University regarding the types of support and the related taxability of each.
1. Offer letters: All letters offering graduate students tuition scholarships, awards towards educational expenses, or other payments will be issued jointly by the Dean’s Office upon recommendation of the respective academic department with a copy to the Human Resources Department and the Admissions Office/International Students Office. Academic Departments may not issue offer letters directly to students, even in the case of Research Fellows. The Human Resources Department will act as a central repository for these letters and assure uniformity and compliance regarding the types of awards and applicable regulations. (See attached sample offer letter).
2. Fellowship Award Form:
A new summary form (see attached) will be completed as the basis for tuition remission and all awards/payments through payroll. This form will be completed by the academic department with the student when the student arrives at the University. The student is required to sign the form, thereby certifying the information and his/her understanding of the fellowship program. This form includes information regarding all types of payments to students. The form must be signed by the Contracts & Grants Office if a grant/contract will be charged. It would then be submitted to Human Resources. This form and offer letter must be attached to a Personnel Action Form (PAF) to initiate payments to the student. Human Resources will forward the Fellowship Award Form and the PAF to the Payroll Department for processing. The tuition remission form which is currently used within the University should be forwarded to the Student Accounts Office in the normal manner. A copy of the tuition remission form should be attached to the Fellowship Award Form. Copies of the Fellowship Award Form would be distributed to the Dean’s Office, Admissions Office/International Student Advisor after processing.
Internal Revenue Service Reporting
Forms 1042 – S and W-2
The Form 1042-S – Foreign Person’s U.S. Source Income Subject to Withholding is a tax statement used to report most types of payments made to non-resident aliens (NRA). The University is required to file with the IRS a separate Form 1042-S for each recipient who receives income. A Form 1042 – S is also required to be furnished to each recipient. This form shows the type of income paid, the amount of tax withheld, the withholding rate and the country of the recipient.
The University is the withholding agent and tax withholding is required on U.S. source payments made to an NRA unless excluded or exempted. The tax rate is currently 14% for all persons on an F, J, M or Q visas within the U.S. and 30% for all other types of visas. Taxable income is also required to be reported on a Form W-2.
The taxable portion of payments to nonresident alien students temporarily in the U.S. on an F-1 or J-1 visa will be subject to Federal and state income taxes. The tax treaties between the U.S. and foreign countries govern the amount of gross wages subject to withholding. For example, the treaty with the Republic of China exempts the first $5,000 of gross wages from withholding. Nonresident aliens on an F-1 or J-1 visa are not required to pay social security and Medicare taxes.
Forms 8233 and W-8BEN
NRA students are required to provide either Form 8233 – Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual or W-8BEN – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding to the University (International Students Office) to obtain treaty benefits which provide an exemption from U.S. income tax and from withholding on compensation. The International Students Office should review and forward a copy of these forms to the Human Resources Department. It is necessary for these forms to be received before payments can be processed to students.
The individual student’s tax liability depends on each individual’s circumstances. Therefore, students should contact their personal tax advisor with any questions.
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