Tax Information for Student Payments
The Internal Revenue Service (IRS) has set guidelines that Loyola University Chicago (LUC) must follow in order to determine how payments to students should be taxed and reported.
This information is to inform department administrators as well as students of the tax implications of the various different types of payments that students can receive that are designated as scholarships, fellowships, prizes, awards, or honorariums. The Tax Information Certificate should accompany Human Resource and Accounts Payable requests to pay a student a fellowship, award, or honorarium.
Scholarship – generally an amount paid or allowed to a student at an educational institution for the purpose of study. Scholarships are disbursed through the Office of the Bursar. A scholarship to a student should not be requested through Accounts Payable or Human Resources. A scholarship should not require a student to perform any services, if it does, it is considered compensation for services and is subject to payroll wage reporting and withholding and will be paid through Payroll.
A qualified scholarship is a tax-free amount (excluded from income) if it meets both these criteria:
- The student is a candidate for a degree at an educational institution
- Amounts received as scholarship are used for tuition, fees, books, and supplies required for enrollment or attendance at LUC
A non-qualified scholarship is not tax free (included in income) if:
- Amounts paid to or on behalf of a student are for incidental expenses, room and board, travel, research, and optional equipment are considered non-qualified expenses
A scholarship is awarded to a student which will provide tuition remission and free room and board. No services are required. Is this scholarship taxable?
Answer: The part of the scholarship that pays for tuition is not taxable since it covers a qualified expense. However, the amount of the scholarship that covers room and board is considered taxable income to the student. Please consult your tax advisor for further information on reporting your taxable scholarship payments.
Scholarship payments made to nonresident alien students follow different reporting and taxation rules. See the rules for nonresident aliens below.
Fellowship – generally an amount paid to an individual to aid in the pursuit of study or research in order to enhance his or her training in a specific field of interest. The terms of receiving a fellowship may or may not include a service or work requirement. If a fellowship requires an individual to perform services, the fellowship will be considered compensation for services and is subject to payroll wage reporting and withholding.
Are fellowship payments taxable income to recipients?
- Answer: Yes, all fellowship payments are considered taxable income. Since a fellowship payment does not directly cover qualified expenses (tuition and fees required for enrollment) it is considered a non-qualified payment. The University is generally not required to either withhold income tax or file any information return for a fellowship payment made to a U.S. citizen or permanent resident. The student may, however, have an obligation to report it on their income tax return .
- One exception to this would be fellowship payments that include payment for services rendered. These types of payments will be reported on Form W-2 and subject to federal and state tax withholding. Please consult your tax advisor for further information on reporting your fellowship payments. If you need to know the amount of a fellowship you received during the calendar year that was not reported on a W-2 please contact your department administrator. Fellowship payments made to nonresident alien students follow different reporting and taxation rules. See the rules for nonresident aliens below.
A fellowship is awarded to a student that will require the student to be a teaching assistant; will that be considered a fellowship or compensation for services?
- Answer: Paying a student in exchange for teaching is considered compensation for services.
A fellowship is awarded to a student who will be performing research; will that be considered a fellowship or compensation for services?
- Answer: It depends on the specific circumstances surrounding the research, and whether that research is guided or independent. Guided research that is required as a condition of the fellowship will be treated as compensation for services. Fellowship contracts should not be structured in a manner where the research component is ambiguous in order to yield a favorable tax treatment for the student. If only a certain portion of a fellowship is related to research considered services, that portion needs to be allocated as wages and any additional fellowship funds for materials, living expenses, etc. would not be included as wages.
- Guided research: research under the direct supervision of LUC that primarily benefits LUC. LUC has control over the research and will use the results of the research. For example, student research that is supervised by a faculty member or a requirement that a student perform research for a specified amount of hours per week.
- Independent research: primary purpose of the research is to further the education and training of the student in his/her individual capacity. LUC does not control the research, student has the ability to direct and control the research.
A prize or award given to a student in recognition of academic achievement, special recognition (i.e., writing contest, business competition) or a prize won by chance, is taxable income to the student. Prizes and awards should be paid through the Accounts Payable department and will be reported on IRS Form 1099-MISC as necessary. Prizes and awards that are directly related to employment achievement (i.e. “Student Employee of the month”) are taxable as wages and reportable on Form W-2 and should be processed via Human Resources and Payroll. Nonresident alien student awards are reported on Form 1042-S.
In some instances, some students will be provided an honorarium for other services that may be outside of the scope of normal employment (i.e., DJ services, occasional lecture, music performance, etc.). Honorarium requests should not be made to pay students in lieu of wages for work performed as an employee. Under no circumstances should students be promised a flat fee for services that should be paid hourly under the U.S. Department of Labor’s Federal Wage and hour law requirements.
If the honorarium recipient is not an LUC employee, the award will be issued through the Accounts Payable Department. The awarded funds will be reported by LUC as Non-Employee Compensation (Box 7) on IRS Form 1099-Miscellaneous for proper reporting by the recipient.
If the individual is an LUC employee, the honorarium will be processed through the Human Resources Department and Payroll Services, and all applicable federal, state, and FICA tax withholdings will be made and income added to the Form W-2.
Nonresident alien (NRA) students who receive scholarships and fellowships from the University are subject to the same rules as U.S. citizens/permanent residents as to whether or not the award is taxable. However, non-qualified scholarship and fellowship payments to NRA students that include non-service payments, room and board, food allowances, incidental expenses, travel, and non-required equipment are subject to tax withholding at the time of payment. Any scholarship or fellowship used to pay these costs are taxable and are reported on a 1042-S Form. Individuals on F, J or M visas are taxed at the rate of 14% for Federal taxes and 4.95% for Illinois State taxes. If an individual is eligible for a tax treaty benefit, this may reduce or eliminate his or her tax withholdings. If a student wishes to take advantage of a tax treaty, if applicable, he or she must enter all of their data into the GLACIER Nonresident Alien Tax Compliance system. Students should send an e-mail to email@example.com to request and login and password. A completed Tax Summary Packet must be submitted to General Accounting at firstname.lastname@example.org. Additional tax treaty documents will also be required if applicable.
As a reminder, any new nonresident alien student who will be receiving fellowship, wages, or awards should enter all of their data into the GLACIER Nonresident Alien Tax Compliance system and send the completed Tax Summary Packet with requested documents to email@example.com.
For more information on Glacier, please visit Loyola’s GLACIER Nonresident Alien Tax Compliance page.
For further information on scholarships and fellowships and additional assistance in determining tax free and taxable payments refer to IRS Publication 970, Tax Benefits for Education.
For further information on educational tax credits please visit the IRS Tax Benefits for Education: Information Center.