Payments to students and their taxability

There are many different types of payments to students who attend Florida International University. Each has its own taxation implications. In sum, the payments fall into two categories:

Non-taxable (Excludable from Student Income)

• scholarships/fellowships that are used for qualified tuition and related expenses
• student reimbursements for students purchasing a service or good while acting as an “agent” of the University, and any charitable activity
• student refunds for student account overpayments and/or excess Title IV funds

Taxable (Includable in Student Income)

• prizes and awards
• funding provided via a stipend payment for a student to attend a conference or conduct research, such as thesis research (unless such expenses further University purposes, such as a student organization’s activities)
• funding provided via a stipend payment for a student to go on a summer or other internship, or to go on a job search/interview
• funding provided via a stipend payment for room, board, and personal expenses
• compensation for services related to work

Scholarships or fellowships received to offset non-qualified educational expenses are taxable to the student. However, for students who are U.S. citizens or resident aliens, there is no tax withholding or Form 1099 reporting required by the University.

For scholarship or fellowship payments given to nonresident alien students, there is tax withholding and reporting on Form 1042-S to the IRS.

Payment for winning a competition or being a top performer is not a scholarship or fellowship. Instead, the payment is a prize or award. Prizes and awards are taxable to the recipient. A prize or award paid to a U.S. student (including a resident alien) may be reportable to the IRS, depending on the prize amount, on Form 1099-MISC. If the recipient is a nonresident alien for U.S. tax purposes, the amount is reported on Form 1042-S and may be subject to withholding.

Examples: “Non-qualified” scholarships/fellowships may include payments for room/housing, board/meals, medical, stipends, thesis support, travel, cash, as well as non-required fees, books, supplies, and equipment.

Visas: All NRA student visa information is on file via the Tax departments International Tax Navigator system. This documentation is required to determine if the student’s visa allows for payment.

For application of tax treaty benefits: Require IRS Form 8233. FIU students are required to setup an appointment with FIU’s tax department to apply for treaty benefits by sending an email to tax@fiu.edu.  If no treaty benefits are available, and the student does not have a F1, J1, M1, or Q Visa, then 30% taxes will be applied to the student’s account. Also, if the student does not, or will not, complete these forms, then no treaty benefits are available.

For F1, J1, M1. & Q Visas only: Tax withholding will not exceed 14%. Treaty benefits may also be available.

Sourcing Rules: Tax withholding only applies to U.S. source income. If the University is serving as the paying agent for a foreign grantor located outside of the U.S., then the University is not required to withhold tax.

IRS Form 1042-S: FIU will provide each year to NRA students who receive a taxable scholarship or fellowship.

Prizes and awards are amounts received primarily in recognition of religious, charitable, scientific, educational, artistic, literary, civic achievement, or as the result of entering a contest. All prizes and awards (with the exception of qualified scholarships) are includible in gross income (Code Sec. 74 (a); Reg. § 1.74-1(a)) unless all the following conditions are met:

1. The recipient was selected without any action on his or her part to enter the contest.
2. The recipient is not required to render substantial future services as a condition to receive the prize or award.
3. The prize or award is transferred by the payer to a government unit or tax-exempt charitable organization as designated by the recipient.

All three of the above conditions must be met in order to exempt the prize from taxation.

For U.S. and resident alien students, all prizes must be reported by the University to the IRS on Form 1099-MISC if total prizes to the student in the relevant year are $600 or greater. It is the responsibility of all prize recipients, regardless of the amount of the prize, to report the taxable prize received to the IRS on their personal income tax returns.

For nonresident alien (NRA) students, the University is required to withhold 30% tax on the full amount of the prize. The prize amount will be reported to the IRS and to the student on Form 1042-S.

How to Process

Prizes and awards must be awarded and processed through FIU’s Financial Aid office and disbursed via the student’s account to be included in the student’s financial aid package and may reduce other financial aid the student may receive.

Prizes and awards are always taxable. The University will report the prize or award to the IRS and the student on IRS Form 1099-MISC, Miscellaneous Income (Form 1099 reporting is only required if total awards are $600 or more in the year), or on IRS Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

Exception: If restrictions are placed on the prize or award, it is considered a scholarship; it should be awarded and processed through the University’s financial aid system.

A stipend is paid to students as a living allowance, in no instance is a stipend a payment involving services related to work. Although these payments are usually taxable income to the student, the University is not required to report them to the student or the IRS, nor is the University required to withhold tax on them.

In 1987, the IRS ruled that an institution is not required to either withhold income tax or file any information returns with respect to taxable scholarship/fellowship grants paid to U.S. students (including foreign resident aliens). Therefore, even though the individual may receive taxable scholarship/fellowship income, the institution making the payment is not required to withhold any tax or file any reports with the IRS with respect to the taxable grant.

This “no withholding/no reporting” rule, however, is subject to two important caveats:

1. The scholarship/fellowship recipient must be either a U.S. citizen or a U.S. resident alien for tax purposes.
2. The payment that the institution makes to the individual must be a “scholarship” or “fellowship” and work.

The most common examples of nonqualified scholarship/fellowship are payments used to pay for room, board, travel, and medical expenses, etc. The following payment types are generally not considered stipends, and that term should not be used to refer to them.

1. Expense Reimbursement
2. Bonus
3. Award or prize to student

International Students

All amounts paid to nonresident aliens in the form of scholarships, fellowships, grants, and financial aid, which are not excludible from gross income as a “qualified scholarship” under I.R.C. 117, must be reported to the IRS, regardless of the amount paid, unless the grant is from sources outside the United States.

If the recipient is a nonresident alien, income tax withholding is required at a rate of 14%, unless the grant is exempt under a tax treaty between the U.S. and the recipient’s home country. For the 14% rate to apply, the fellowship must for a degree candidate be “incident” to a qualified scholarship. For a non-degree candidate, the scholarship or fellowship must be from certain organizations, including Florida International University. And, if the scholarship/fellowship payment is made to a nonresident alien, the taxable portion of the grant (generally, amounts paid for room, board, and travel) must be reported to both the IRS and the individual on Forms 1042 and 1042-S. The IRS, however, does not require Form 1042/1042-S reporting with respect to the nontaxable portion of the scholarship/fellowship grant, which generally consists of amounts paid for tuition and required fees. 

An amount represents compensation for services, and not a scholarship or fellowship grant per IRS Treasury Regulation 1.117-4, if:

1. the amount represents compensation for past, present, or future employment services.
2. the activity the grant payments fund is “subject to the direction or supervision of the grantor”; or
3. the grant payment enables the recipient to “pursue studies or research primarily for the benefit of the grantor.”

These compensated services are considered wages for employment tax purposes and are subject to employment tax withholding and reporting requirements. Whether a payment is of the nature of a scholarship or is of the nature of compensation depends on the “primary purpose” of the payment: “Was the taxpayer paid to work or paid to study?”

More specifically, with respect to research activities, an issue often arises whether the research activities constitute “services” or “independent research.” Factors that the IRS and the courts have considered in making this determination include:

• The extent of faculty supervision of the student’s work, including planned time schedules and required progress reports.
• The student’s ability to direct the course and direction of the research activities.
• Whether the student can retain any patents or copyrights resulting from his or her efforts.
• Whether the research services are directly related to the fulfillment of a contractual commitment by the university.
• Whether the student is required to work a specified number of hours a week on the research project.
• Whether the payment made to the student was relatively small (generally indicative of a fellowship) or relatively large (generally indicative of compensation), although in the case of large amounts, the amount above an amount typically paid for the services provided may be a non-wage fellowship.
• Whether the university treated the student as a student worker as evidenced by withholding tax on the payments as wages and providing faculty privileges and other employee benefits.

This category is defined as payments made for teaching, research and/or other activities performed for the benefit of the University, including activities for the University that may be associated with the student’s course of study and educational experience. Payments received in connection with the performance of service by a student are taxable income, and may be subject to federal, state and FICA tax withholding.

How to Process

Citizens & International Students
Payments for services are processed through the University’s Payroll Office and the University’s Payroll processing system. Please visit the Payroll Compensation section of the FIU HR website.