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Payment of Scholarship or Fellowship

A "scholarship" is "an amount paid or allowed to, or for the benefit of, a student, whether an undergraduate or graduate, to aid such individual in pursuing his studies" and a "fellowship" is "an amount paid or allowed to, or for benefit of, an individual to aid him in the pursuit of study or research."A "qualified scholarship" is an amount received as a scholarship grant, but only to the exempt that it is used for either (i) tuition and fees required for enrollment or attendance at the educational organization, or (ii) fees, books, supplies, and equipment required for courses of instruction at the educational organization. This means that scholarship payments used for expenses such as room, board, travel, research, and clerical help - as well as equipment and other expenses not required either for enrollment or attendance at the educational organization - cannot be treated as a "qualified scholarship" for purposes of tax exclusion and are subject to tax withholding of 30 percent or 14 percent (depending upon the student's visa status) unless exempted by tax treaty.

 

A general rule to apply is that a grant will be treated as taxable compensation if paid for past, present, or future services. It will not be excludable if it represents payments for teaching, research, or other services by the student required as a condition of receiving the qualified scholarship, regardless of whether all candidates for the degree are required to perform such services.

Note: As non-employee payments, scholarship and fellowship payments are exempt from FICA withholding. However, these payments are subject to NY State withholding as "single" with one exemption.