Taxes and Scholarships, Fellowships and Grants
Determine whether your scholarship, fellowship or grant is "qualified" or subject to tax withholding.
Under section 117 of the Internal Revenue Code a "qualified scholarship" is defined as scholarships and fellowships used to pay "tuition and fees required to enroll at or attend an eligible educational institution; and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.” Only qualified scholarship payments made to nonresident aliens are not subject to withholding. Students must review IRS Publication 970 to determine which portions of their scholarship or fellowship payments are considered qualified.
Scholarship, fellowship or grant payments for nonresidents
Any portion of the scholarship, fellowship, or grant that does not directly pay for items mentioned above is considered non-qualified and subject to 14% federal taxation as long as the student is a candidate for degree at Northwestern and in F, M J, or Q status. Illinois state taxes are not withheld on non-service payments and any tax payments must be paid directly to the state by making estimated tax payments. Individuals will receive Form 1042-S summarizing their non-qualified scholarship by March 15th of the following year.
Scholarship or fellowship payments U.S. tax residents
Scholarship/Fellowship payments for U.S. citizens, Permanent Residents and U.S. tax residents are taxable but not subject to tax withholding unless a student specifically requests taxes to be withheld via federal and state W-4 forms. The payments may be considered taxable income and must be reported when filing your U.S. federal and state tax returns. Please see IRS publication 970 to assist in determining which portion of these payments is considered taxable income. If you would like Payroll to withhold taxes, complete the Federal and IL W-4 Employee’s Illinois Withholding Allowance Certificate forms by entering a specific dollar amount on line 6 for the federal W-4 and line 3 on the Illinois W-4.
Once you add the additional tax withholding, it is very important to know this extra withholding will continue on each payment you receive from the University until you submit new federal and state W-4s removing the additional amount. That means if you later switch to an assistantship payment (GA, RA, TA) or any other type of employment income (prize, additional pay, etc.) where regular federal and state taxes are withheld, you will then be taxed on the payment for BOTH the normal tax withholding and the additional amount you entered on the W-4s. To avoid this, make sure to stay alert to any funding changes. If you will be changing from scholarship/fellowship to another type of payment (or back), you must submit the federal and Illinois W-4 forms to the Payroll Office by the 15th of the month for the tax change to be effective for that month. Due to federal and Illinois tax laws, Northwestern is unable to refund any taxes to students that fail to adjust their W-4s by the required deadlines.
These payments are not issued a tax form unless taxes were requested to be withheld from the payment. Payroll will send an email around January 31st of the following year summarizing your non-qualified U.S. scholarship and point you to IRS Publication 970 for instructions on determining which portion is taxable and how to report the income on your 1040 tax return. If you request taxes to be withheld from these payments, you will receive a W-2 that reflects the taxes withheld.
Source of the payment
In general, scholarship/fellowships that originate from sources outside the United States are not taxable or reportable to tax nonresidents.
Revenue ruling 89-67 describes the source of the payment is determined by the "residence or the payor" not the location of the educational activity. A nonresident alien studying in the U.S. but receiving scholarship from a foreign source is not subject to tax withholding or IRS reporting on those funds, even if paid through Northwestern. Also non-resident scholarship/ fellowship stipends that will be used for educational purposes outside the U.S. may be exempt from U.S. taxation if certain requirements are met. Individuals receiving those payments should complete the Statement for Independent Educational Activities Conducted Outside the U.S. along with the appointment/position form.
- Example 1: The scholarship/fellowship payment is considered foreign source if the foreign student's government contracts with Northwestern to administer the scholarship funds to their students in the U.S.
- Example 2: A nonresident student is performing research in their home country related to their studies at Northwestern and will be using the funds to pay for these activities outside the U.S.