Scholarships and Fellowships
The tax treatment and reporting requirements of financial support (whether it is called a scholarship, fellowship, grant, award, or stipend) varies based on a few factors including:
- the terms of the agreement,
- how the proceeds are used,
- the residency and immigration status of the recipient, and
- whether services are required to be performed.
If there is any service component tied to the financial support, the amounts are considered compensation and the recipients are treated as employees. These payments are subject to withholding and reporting as wages.
Scholarships
The Internal Revenue Service generally defines scholarships as amounts paid to, allowed to, or for the benefit of a student to aid in the pursuit of studies. It may also be in the form of a reduction in the amount owed by the recipient for tuition, room and board, or any other fee.
Scholarships are excludable from taxable income (as provided in Section 117 of the Internal Revenue Code) if all the following requirements are met:
- The recipient must be a candidate for degree at an eligible educational institution. Emory is an eligible educational institution. The recipient does not necessarily have to be a candidate for a degree from Emory, but must be a candidate for a degree.
- No teaching, research, or other services are required as a condition of receiving the scholarship.
- The amounts received must be used to pay for "qualified education expenses." Qualified education expenses include tuition and fees related to education that are required to enroll at or attend the educational institution. Also included are course-related expenses such as fees, books, supplies, and equipment required for the course and required for all students enrolled in that course. Expenses for items not required for the course but only suggested are not qualified education expenses.
For an amount to be treated as a scholarship and not compensation, there must not be any obligation for the student to provide any services.
Funds received that cover other expenses do not qualify as tax-free scholarship income, as they are more personal in nature and are not directly related to the student's education, even if these amounts must be paid as a condition of enrollment. These include expenses such as room, board, living allowances, travel, optional equipment, and health insurance. These non-qualified scholarship amounts are taxable to the recipient.
U.S. citizens, permanent residents and resident aliens
Emory's requirement for reporting these scholarships is defined under Internal Revenue Service rules. The university is not required to withhold income tax on any scholarship payments to U.S. citizens, permanent residents, or resident aliens (for tax purposes), and these scholarships are generally not reported to the IRS on Form 1099-MISC if paid/processed through Emory Student Financial Services (OPUS).
Emory (via student accounts office) will issue Form 1098-T to all students enrolled during the calendar year that will reflect amount of qualified tuition and expenses paid during the calendar year as well as all scholarships, grants, or third-party payments processed by Emory through student accounts. Amounts paid through Emory accounts payable will generally be reported on Form 1099. The student must compute and report the taxable portion of scholarships on his/her individual income tax return.
The university cannot make the determination of a student’s taxable income from scholarships. Emory advises students that some or all of the financial support may be taxable and it is the student's responsibility to seek advice on potential income tax and filing requirements.
Nonresident aliens
Emory University is required to report all scholarship payments to nonresident aliens that are not directly applied to tuition and fees or other qualified expenses. Section 1441 of the Internal Revenue Code requires that Emory (as payor) withhold or otherwise pay the appropriate tax on any payment made to or on behalf of a nonresident alien.
In many cases, the tax rate applied to scholarships is 14%, but this rate can be different based on country, visa type, length of stay, and availability of tax treaty benefits. To prevent hardship, Emory may pay the tax on behalf of the students if the income is not eligible for treaty benefits for amounts applied in the student finance system. This is accomplished by "grossing up" the taxable amounts and reporting the full amount to the Internal Revenue Service as if the tax had been withheld. See NRA Definitions for more information on "grossing up" income.
If a nonresident alien has received taxable scholarship amounts during the calendar year, they will be issued a Form 1042-S by the tax office. See Nonresident Alien Tax Assistance for further information.
Fellowships
Fellowships are amounts paid for the benefit of an individual to pursue study, training, or research, and generally require services to be performed (either currently or in the future) as a condition of the award.
Payments are considered compensation for services if:
- The amount represents compensation for past, present, or future employment services
- The activity being funded is subject to the direction or supervision of the university
- The payment enables the recipient to pursue studies or research primarily for the benefit of the university
These recipients are deemed to be Emory employees and all procedures for employment must be followed. The payments are made via payroll, and are subject to OASDI and Medicare withholding, as well as Federal and Georgia income tax. Individuals will receive a Form W-2 for the calendar year. Additional rules apply to nonresident aliens. See Nonresident Alien Tax Assistance for further information.
National Institutes of Health
Payments made to National Research Service Award (NRSA) fellows are not treated as compensation for services. The IRS has ruled that these stipends are part of a non-compensatory training grant. These awards may seem to fall under the scholarship rules, except the recipients are conducting research. Under the terms of the award administered by the National Institutes of Health, Emory is not required to report these payments on Form 1099 and no income tax withholding is required for fellows who are U.S. citizens or resident aliens for tax purposes. Different rules apply to nonresident alien fellows and tax withholding is required.
Remember
In most cases, non service-related scholarships are made via student accounts. Payments made through student accounts are reported on Form 1098-T (or Form 1042-S for Nonresident Aliens). Any payments made through the Payroll Department for NRSA fellows must have prior approval and will not be reported on any tax form even though they may be taxable to the recipient. Note that payments made through the accounts payable department are reported on Form 1099-MISC (or 1042-S for Nonresident Aliens).
Also, keep in mind that whatever terminology is used in describing the payment, the nature and substance of the financial support determine tax treatment: Was the individual paid to study or paid to work? Contact the Emory Tax Department if you need assistance with a particular payment.
For more information, IRS Publication 970, Tax Benefits for Education provides details as well as information on other tax incentives such as the Hope and Lifetime Learning Credits and the Student Loan Interest Deduction.