SCHOLARSHIPS, FELLOWSHIPS, OR STIPENDS

The purpose of the following is to provide you with information that will assist you in preparing documents to award scholarship, fellowship and stipend awards to students.

If the student is a U.S. resident for tax purposes, the university has no reporting responsibility with respect to scholarship awards if such amounts are:

1: considered a qualified scholarship and

2: not considered compensation for services

How to determine if payment is a qualified scholarship within the externally funded grant document, the award must state to the effect that:

• payment must be for tuition and fees required for enrollment and attendance at the institution
• fees, books, supplies and equipment required for courses of instruction at the institution
• not required to render current or future services as a condition of the scholarship

1. If the externally funded grant document is silent on what use is to be made of the funds then assume it is for qualified purposes.
2. If the externally funded grant document states that the funds are to be used for something other than tuition and fees then it is not for a qualified purpose.

A qualified scholarship is excluded from the recipient's taxable income only if the proceeds are used for qualified tuition and related expenses. It is the responsibility of the recipient to establish that the amounts received qualify. To the extent the student is not able to substantiate the appropriate use of funds if asked by the IRS, the student could be required to recognize taxable income. If grant specifies that funds cannot be used for qualified tuition and related expenses, then the award cannot be considered a qualified scholarship and would be taxable to the recipient.

With respect to related expenses, to qualify for exclusion from income, the fees, books, supplies and equipment must be required of all students taking this particular course. Incidental expenses are taxable to the recipient.

Once the University has determined the residency status of the payee, the next issue should be to determine the type of payment being made. After the payment type has been determined, the University should start with the premise that all payments from U.S. sources made to on behalf of a nonresident alien are taxable unless the payment can be excluded or exempted from tax withholding.

"The University could have a withholding obligation and duty to report amounts constituting payment for services/wages."

In the event that a scholarship represents payment for services, the University must comply with any applicable withholding and reporting requirements including:

• wage reporting on Form W-2, "Wage and Tax Statement," and Form 941, "Employer's Quarterly Federal Tax Return;"
• withholding of federal and state income taxes
• withholding of FICA, if applicable; and
• payment of federal or state unemployment tax, depending upon the circumstances.

FICA rules provide an exception for services performed by a student who is enrolled and regularly attending classes at a college, university, or school.

Since the student is ultimately responsible for establishing that grant amounts are properly excluded from his or her income for the year, the student is responsible for keeping appropriate records to substantiate qualified tuition and expenses. It is important for students to retain copies of bills, receipts, cancelled checks, or other documents that would show the use of the grant amount. If a student meets the threshold reporting requirement for income tax purposes, that student must report amounts considered to be wages on Form 1040, U.S. Individual Income Tax Return. If a student is considered an independent contractor, such amounts should be reported on Schedule SE of Form 1040, to determine earnings from self-employment. If a student has net earnings from self-employment of $400.00 or more, that student may be liable for self-employment tax. Generally, a student will have earnings from self-employment only if such earnings represent payment services as outlined above. The taxable portion of a scholarship or fellowship is generally not considered subject to self-employment taxes.

In order to exclude a qualified scholarship from income, the recipient must be a candidate for a degree. Use the following chart to determine if recipient is considered a Candidate for Degree:

The University does not report scholarship, fellowship, and stipend amounts included in income for the purposes of filing an income tax return, the student must show such payments as income if the following are true:

If considered compensation, payment should be made through payroll.

Prior to completing the paperwork to give a student any scholarship, stipend or fellowship, the student should be informed whether taxes will be withheld from the award or if he or she will be responsible for determining the tax status of the payment.

The University will make notification of the student in writing. The standard letter follows:

<Student>
<Address>
<City, State, Zip Code>