As a general rule, taxable scholarships, fellowships, and grants paid to nonresident aliens are subject to either 14% or 30% withholding of U.S. federal income tax. However, nonresident alien students, trainees, or grantees who receive U.S. source grants or scholarships may be entitled to reduced withholding on the taxable part of the grant or scholarship under an alternate withholding procedure. The students, trainees, or grantees must have been admitted into the United States on an "F," "J," "M," or "Q" visa. This alternate withholding procedure is not mandatory for the withholding agent.
Under this alternate withholding procedure, the student, trainee, or grantee gives you a specially prepared Form W-4. The student, trainee, or grantee must complete Form W-4 annually following the instructions given here and forward it to you, the payer of the scholarship, fellowship, or grant, or your designated withholding agent. You may rely on the information on Form W-4 unless you know or have reason to know it is incorrect. At year end you must file a Form 1042-S to report the taxable scholarship, fellowship, or grant paid to each student, trainee, or grantee who gives you, or your withholding agent, a Form W-4.
Each student, trainee, or grantee who files a Form W-4 must file an annual U.S. income tax return to be allowed the exemptions and deductions claimed on that form. If the individual is in the United States during more than one tax year, he or she must attach a statement to the annual Form W-4 indicating that the individual has filed a U.S. income tax return for the previous year. If he or she has not been in the United States long enough to have to file a return, the individual must attach a statement to the Form W-4 saying that a timely U.S. income tax return will be filed.
The personal exemption amount should be shown on line A of the Personal Allowances Worksheet that comes with Form W-4.
Generally, zero (-0-) should be shown on line B of the worksheet. But, a student, trainee, or grantee who qualifies under Article 21(2) of the United States-India Income Tax Treaty can enter the standard deduction if he or she does not claim away-from-home expenses or other itemized deductions.
Generally, zero (-0-) should be shown on lines C and D of the worksheet. But, an additional personal exemption amount may be allowed for the spouse and each dependent if the student, trainee, or grantee is:
- A resident of Canada, Mexico, or South Korea,
- A U.S. national (a citizen of American Samoa, or the Commonwealth of the Northern Mariana Islands), or
- A student or business apprentice (trainee) from India who is eligible for the benefits of Article 21(2) of the United States-India Income Tax Treaty
These additional amounts should be entered on lines C and D, as appropriate.
Since lines E, F, and G of the worksheet do not apply to nonresident aliens subject to this procedure, there should be no entries on those lines.
The nonresident alien student, trainee, or grantee may deduct away-from-home expenses (meals, lodging, and transportation) on Form W-4 if he or she expects to be away from his or her tax home in a foreign country for 1 year or less. The amount of the claimed expenses should be the anticipated actual amount, or estimated amount.
The actual expenses or the per diem allowance should be shown on line A of the worksheet in addition to the personal exemption amount.
The student, trainee, or grantee can claim other expenses that will be deductible on Form 1040NR. These include student loan interest, certain state and local income taxes, charitable contributions, casualty losses, and moving expenses. He or she should include these anticipated amounts on line A of the worksheet.
The student, trainee, or grantee can also enter on line A of the worksheet, the part of the grant or scholarship that is tax exempt under the statute or a tax treaty.
Lines A through D of the Personal Allowances Worksheet are added and the total should be shown on line H.
The payer of the grant or scholarship must review the Form W-4 to make sure all the necessary and required information is provided. If the withholding agent knows or has reason to know that the amounts shown on the Form W-4 may be false, the withholding agent must reject the Form W-4 and withhold at the appropriate statutory rate (14% or 30%). However, if the only incorrect information is that the student, trainee, or grantee's stay in the United States has extended beyond 12 months, the withholding agent may withhold under these rules, but without a deduction for away-from-home expenses.
After receipt and acceptance of the Form W-4, the payer must withhold at the graduated rates in Publication 15 (Circular E) as if the grant or scholarship income were wages. The payor should use the "Tables for Percentage Method of Withholding" found in IRS Publication 15 (Circular E). The gross amount of the income is reduced by the total amount of exemptions and deductions on the Form W-4 and the withholding tax is figured on the rest.
When completing Form 1042-S for the student, trainee, or grantee, enter the gross scholarship or fellowship grant in box 2, enter the withholding allowance amount from line H of the Personal Allowances Worksheet of Form W-4 in box 3, and show the net of these two amounts in box 4.
The payer of the scholarship/fellowship income has regulatory authority to allow a deduction for the personal exemption amount even though the scholarship/fellowship recipient has not filed any form to claim the personal exemption amount. The payer may allow a deduction for the personal exemption amount if a deduction for the personal exemption amount has not already been allowed against wages paid by the payer to the payee in the current year, or if the payer is not aware that any other withholding agent has already allowed a deduction for the personal exemption amount in the current year. This means that if the total annual taxable scholarship/fellowship income of a nonresident alien does not exceed the annual personal exemption amount, then the withholding agent can allow a deduction for the personal exemption amount against the scholarship/fellowship income, without the filing of any Form W-4, in order to arrive at a zero taxable amount of scholarship/fellowship income subject to withholding. At year-end the withholding agent would report the gross taxable amount of the scholarship/fellowship income in block 2 of Form 1042-S. He would report the personal exemption amount as a withholding allowance in block 3 of Form 1042-S. He would report zero taxable income in block 4 of Form 1042-S.
Revenue Procedure 88-24 1988-1 C.B. 800 for more information
Scholarships and Fellowship Grants (Income Code 15) in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
Treasury Regulation 1.1441-4(c)(2)
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.