In accordance with Internal Revenue Service (IRS) regulations, in general, U.S. source taxable scholarships, fellowships, and grants that do not represent compensation for services are not subject to withholding when paid to U.S. citizens and residents. However, they are subject to withholding when paid to nonresident aliens.
The standard withholding tax rate is 30%. However, the withholding rate may be exempt or reduced to 14% based on applicable tax treaties and visa classifications, among other factors. As such, international students receiving such awards should be informed and prepared for these tax implications.
When a scholarship, fellowship, or grant is awarded to an international student, the gross amount of the award will be posted to the student’s account, at which time the full award will be available to the student. Subsequently, after the final drop date each semester, various analyses are performed by the Office of the Controller to calculate applicable tax withholdings. Taxes are then paid to the IRS, with recoupment of the amount occurring through issuance of a tax bill to the student.
We strongly recommend these potential tax implications be concurrently communicated to the student when applicable scholarships, fellowships, or grants are awarded. Nonpayment of existing tax bills could prevent the student from registering for future courses.
For additional assistance with determining proper student payment classifications and disbursement methods, see the Student Payment Method Decision Tree [pdf] available on the Office of the Controller’s website.