Form 1042-S University Payroll F1,J1 Scholarship,Fellowship, Wages

[Administrator]

Scholarships and Fellowships

A scholarship or fellowship grant (income code 15) paid to a nonresident alien who is temporarily present in 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 the nature of the payments whether the recipient is a candidate for a degree.
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.

Degree Candidates
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 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.

Federal withholding:
Undergraduate or graduate scholarship or fellowship payments to nonresident aliens who are degree candidates are not subject to Federal income tax withholding and are NOT REPORTABLE on Form 1042-S. These are amounts related to 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 in excess of tuition, fees, and course related expenses are subject to reporting on the 1042-S and withholding of Federal income tax (14%). Expenses subject to withholding include payments for room and board, travel research, and other expenses not required for enrollment. 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).

Non-Degree Candidates

Resident aliens.

Scholarship or fellowship payments made to post-docs and other non-degree candidates who are resident aliens are not subject to tax withholding or reporting.

Nonresident aliens.

If it is determined, based on the completed Certificate of Foreign Status for Federal Tax Withholding (UCW-8BEN) form, that a nonresident alien is not a candidate for a degree, no exclusion from Federal income tax withholding is allowed unless the payment is excludable under a tax treaty (Click to see a list of tax treaty countries). The amount of the scholarship or fellowship, however, is subject to reporting on Form 1042-S. Tax at the rate of 14 percent is withheld from payments to nonresident aliens who hold F-1 (Student), J-1 (Exchange Visitor), or M-1 (Vocational Student) visas.
However, before the 14 percent rate is applied, an alien is allowed a deduction for one personal exemption, prorated on a daily basis for the period during which the payment is received. Exchange visitors in the United States under the U.S. Information and Educational Exchange Act are also taxed at the 14 percent rate. A Non-Resident Alien Federal Withholding Allowance Certificate Form UC W-4NR/DE 4 (Fill-in Form ), must be completed annually in order to claim reduced withholding on the taxable portion of a nonresident alien's scholarship or fellowship award.

• <LI class=MsoNormal style="mso-margin-top-alt: auto; mso-margin-bottom-alt: auto; mso-list: l0 level1 lfo1; tab-stops: list .5in">An alien who is a resident of Canada or Mexico must claim single status, but may claim the same number of personal exemptions as U.S. citizens.
• A resident of Japan or South Korea also must claim single status but, under certain conditions, may claim additional exemptions for a spouse and children. (In order to claim a personal exemption for a spouse, the claimant must establish that his or her spouse has no income subject to U.S. tax for the tax year.)

For all other nonresident aliens, tax is withheld at the rate of 30 percent on the amount of the grant. No personal exemption is allowed in computing the amount of tax to be withheld; however, one personal exemption may be claimed when the alien's tax return is filed.

Certificate of Foreign Status for Federal Tax Withholding (UCW-8BEN) must be filed by all nonresident aliens who receive U.S. source scholarship or fellowship payments and who want to claim an exemption from withholding based on a tax treaty between the United States and their home country.

Instructions for completing Form UCW-8BEN are included with the form.
The UCW-8BEN would be retained locally and not forwarded to the IRS. A form UCW-8BEN furnished with a U.S. TIN will remain in effect until a change in circumstance makes any information on the form incorrect, provided that UCR t reports on Form 1042-S at least one payment annually to the beneficial owner who provided the Form UCW-8BEN. Nonresident aliens who file a UCW-8BEN must, either have a Social Security Number (SSN) or a Individual Tax Identification Number (ITIN). The absence of a SSN or ITIN will make this form invalid for purposes of claiming tax treaty benefits or a reduced rate of tax withholding.

California State Withholding:
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.

Note: For this chapter, non-residents 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.

Degree Candidates:

Amounts spent for tuition, fees, and course-related expenses (books, supplies and equipment required for courses (books, supplies, and equipment required for courses of instruction) are excludable from recipients's gross income. All other amounts, such as amounts used to pay for room and board, transportation, and other general living expenses, are includable in the gross income of the recipient.

Non-Degree Candidates:

No exclusion is allowed for scholarship and fellowship payments made to non-degree candidates (e.g., post-docs); therefore, the total amount awarded is includible in the gross income of the recipient.
Where to find Information

• <LI class=MsoNormal style="mso-margin-top-alt: auto; mso-margin-bottom-alt: auto; mso-list: l1 level1 lfo2; tab-stops: list .5in">IRS publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations
• IRS publication 519, U.S. Tax Guide for Aliens