These procedures outline the process for requesting scholarship/fellowship payments, determining whether the payment is in fact a scholarship/fellowship or whether it is compensation for services, and provides additional procedures when the payment is made to a foreign national.
Federal Taxation of Scholarships/Fellowships and Prizes
Scholarship and fellowship reporting and taxation are governed by the Internal Revenue Code and Treasury Regulations and enforced by the Internal Revenue Service (IRS). Scholarships/fellowships are not taxable to the extent they do not exceed the cost of tuition and fees, or course-required expenses (fees, books, supplies, equipment). These nontaxable amounts are called qualified educational expenses.
Amounts in excess of these requirements are taxable to the student, such as room/board, travel, research, living allowance, etc. These expenses are called nonqualified educational expenses. Scholarships or fellowships received to offset these nonqualified educational expenses are taxable to the student. However, for students who are U.S. citizens or resident aliens, there is no tax withholding or IRS reporting required by the University. Note that the Office of the Bursar is responsible for issuing Forms 1098-T, Tuition Statement, to the student and to the IRS, which may take into account scholarship/fellowship awards that are processed through that office. For scholarship or fellowship payments that cover nonqualified educational expenses that are given to nonresident alien students, there is tax withholding and reporting to the IRS.
Prizes or awards are taxable to the recipient, and are reportable to the IRS by the University to the extent they total $600 or more during a calendar year. Prizes awarded to nonresident aliens are generally subject to tax withholding and are reportable to the IRS, regardless of the amount.
Compensation: Cash or noncash payments for services rendered. A payment need not be labeled as compensation to be considered compensation. Remuneration for performing research for the University is a form of compensation and not a fellowship.
Employee: Any individual, who, under the common law rules applicable in determining the employer-employee relationship, has the status of an employee.
Employment: Any service, of whatever nature, performed by an employee for the person employing him, irrespective of citizenship or residency of such employee.
Fellowship: An amount given to support a student’s research, usually at the graduate level.
Grant: Another term for scholarship/fellowship that implies the student is not required to repay the amount.
Prize or Award: Any form of award or payment to a student who has entered and won a contest or competition. Examples include raffles, contests and competitions for the best design or story, or being the top performer.
Scholarship: To be considered a scholarship, an amount does not need to be formally designated as such. Generally, a scholarship is an amount paid for the benefit of a student, to aid the student in the pursuit of study at an educational institution. A scholarship or fellowship payment may be in the form of a reduction in the amount owed by the payee to an educational organization for tuition, room and board, or other fees (tuition waiver).
The department providing the scholarship or fellowship grant must determine if the payment is in fact a scholarship or fellowship or is actually compensation for services. The department responsible should analyze the following criteria for each payment to be awarded.
Pursuant to the Internal Revenue Code and Treasury Regulations, in order for a payment to be considered a scholarship or fellowship, the grant must meet the following three conditions:
If any of the above conditions are not satisfied, the payment (or at least a portion thereof) is compensation for services rendered to the University and is not a scholarship or fellowship grant. In such a case, the payment must be processed through the Office of Human Resources, Payroll and Records, because the payee is considered an employee of the University. In such a case, the department should follow the established procedures for adding an individual to the payroll system. See the section below for additional procedures if the payee is a foreign national.
If all the above requirements are in fact satisfied, the payment is considered to be a scholarship or fellowship grant (not compensation for services). The responsible department must complete the Financial Services form Authorization for Scholarship and Fellowship Payments, if required, and submit it for approval before it will be processed by Financial Services. For scholarship/fellowship payments processed against grant departments, the scholarship/fellowship must first be approved by grants and contracts administrative offices, and then routed to Financial Services for processing. For scholarships/fellowships processed against agency-special departments, the scholarship/fellowship may be submitted directly to Financial Services. Please note that scholarship/fellowships cannot be processed on XX2XXXXXX departments.
See the section below for additional procedures if the payee is a foreign national.
Additional Procedures for Scholarship or Fellowship Payments Awarded to Foreign Nationals
Once the department makes the determination noted above (e.g., payment is a scholarship/fellowship grant or payment is compensation for services), there are additional procedures required if such payee is a foreign national.
If the department determines the payment is a scholarship/fellowship:
The foreign national payee must complete a Foreign National Information Form (FNF) which may be downloaded at the Office of Human Resources website under Documents and Forms. Once this form is completed, it should be attached and submitted to Financial Services along with the Authorization for Scholarship and Fellowship Payments. Financial Services may also request the department forward copies of immigration documents (e.g., passport, visa, I-94 card).
Financial Services will then review the scholarship/fellowship request, along with the completed FNF and other documentation to determine the residency status of the student for U.S. tax purposes, and determine whether there is any tax withholding required on the payment or whether a treaty benefit may be applicable. Financial Services may also contact the International Tax Specialist (Specialist) in the Office of Human Resources, Payroll and Records, to determine whether the tax status has already been determined by that office, and/or whether the foreign national may be able to claim a tax treaty.
If Financial Services determines the foreign national is a nonresident alien for U.S. tax purposes, Financial Services will contact the department to communicate whether the scholarship/fellowship is subject to federal income tax withholding or whether a tax treaty may be applicable. If a tax treaty is applicable, Financial Services will inform the department to contact the student to go see the Specialist in Payroll and Records to sign the applicable tax treaty.
If the scholarship/fellowship is subject to federal income tax withholding, Financial Services will ask the department whether it wants the student to be responsible for the taxes and to receive a payment less than what was requested (net of tax) or if the department would like to gross up the payment to pay the income tax on the student’s behalf so the student will receive the requested scholarship/fellowship amount. Financial Services will then process the scholarship/fellowship payment.
If the department determines the payment is compensation for services (payroll):
If the foreign national payee is considered to be an employee based on the analysis outlined above, the department should contact the Specialist in Payroll and Records for assistance or ask the foreign national to go see the Specialist. Payroll and Records will add the foreign national payee to the payroll system if he/she is not already on Payroll.
Scholarship/fellowship payments to be reimbursed by OU Foundation:
There are two types of scholarship/fellowship payments for which reimbursement/payment might be requested through an OU Foundation fund:
In such a case, the OU Foundation payment request will be forwarded to Financial Services. Financial Services will make the determination of the foreign national’s U.S. tax status and whether federal income tax should be withheld from the payment. Financial Services will contact the department directly to inform them that federal income tax must be withheld. Financial Services will then issue the check from a clearing department, forward the check to the OU Foundation, and request reimbursement from the OU Foundation.
These scholarship/fellowship requests are processed by the Office of the Bursar. Please contact OU Foundation and/or the Office of the Bursar when requesting a credit to a Bursar account for a foreign national student.
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