INCOME TAX WITHHOLDING FOR FOREIGN PAYMENTS
Definitions for Tax Purposes
- Scholarship: An amount provided to a student at an educational institution to aid in the pursuit of his or her studies.
- Fellowship: An amount provided to an individual to aid in the pursuit of independent study or research.
If a portion of the scholarship/fellowship award requires service, the NRA student payee may be considered an employee and be paid compensation via the payroll system. Please see Foreign Employees section below.
Non-Service Scholarship/Fellowship Awards
Non-service based Scholarship/Fellowship awards are further categorized for tax purposes into Qualified or Non-Qualified fees. https://www.irs.gov/individuals/qualified-ed-expenses
Qualified Scholarship/Fellowship: A Scholarship/Fellowship awarded to an individual who is a candidate for a degree at an educational institution, which is specifically paid towards qualified tuition and required fees, is considered a Qualified Scholarship/Fellowship Award. Qualified Scholarship/Fellowship awards are excluded from federal tax withholding under Internal Revenue Code Section 117.
Qualified Scholarship/Fellowship fees as shown in the Student Information System (SIS) include:
- Nonresident Supplemental Tuition
- Student Services Fee
- Berkeley Campus Fee
- Class Pass Fee – Transit
- Professional Degree Supplemental Tuition
- Course Material and Services Fee
- Document Management Fee
When the individual is on an immigrant (visa) status of F, J, M, or Q, Scholarship/Fellowship awards in excess of the qualified educational tuition and fees are subject to federal tax withholding at the rate of 14%, unless the student is eligible for a tax treaty exemption.
Typical Non-Qualified Scholarship/Fellowship fees include:
- Living expenses: rent, room and board, meal plans
- University provided student health insurance
- Travel or research study grants
- Non-course related fees, e.g., Late Enrollment Fee
- Nonresident Aliens receiving Non-Qualified Scholarship/Fellowship awards are set up with records in the GLACIER online tax reporting system to determine and document their tax withholding status. GLACIER forms and documents are reviewed by the Glacier Admin Team in Central Payroll. GLACIER determines tax treaty exemptions.
- If Non-Qualified Scholarship/Fellowship awards are posted to the student’s billing account, application of the funds will be held until the GLACIER record is complete. Once the Glacier Admin Team in Central Payroll confirms the tax withholding rate based on the GLACIER record, the Non-Qualified Scholarship/Fellowship award will apply to charges on the billing account and/or be refunded depending on award handling restrictions. This could result in the student being billed to pay the tax withholding amount.
- Non-Payroll payments paid to nonresident aliens during the year will be reported on a 1042-S tax form via the Glacier system, which is available online around February of the following year.
- California State income tax will not be withheld from student payments, however, the student is responsible for filing a California State income tax return.
Foreign Employees (Includes title code 3252 Post-Doc)
- Nonresident aliens will generally have Federal tax withholding restricted to Single with 0 or 1 allowances per IRS Notice 1392
- State tax withholding has no restrictions
- W-2’s are produced to employees on or before January 31 of the following year. In certain cases, a 1042-S tax form will also be produced if UC Berkeley facilitated a federal tax treaty exemption during the year.
Non-Employee Fellowships in the Payroll System (Includes title code 3253-3254 Post-Doc Fellows)
- Federal tax is withheld at 14% unless exempt under a tax treaty or is a resident for tax purposes
- No state tax is withheld
- UC pays a portion of benefits on behalf of the fellow, which is considered fellowship income, also known as imputed income
- The income and withholding amount will be reported on a 1042-S tax form the following year around February
- Resident aliens have no tax withholding and should self-report his/her income on a U.S. tax return
Independent Services (Including Honorarium)
- Federal income tax withholding rate is generally 30% on most U.S. sourced income payments to foreign persons
- California State income tax will be withheld at the rate of 7% from any payment over $1500.00 unless:
- Services are not conducted in California
- The payee is a California resident
- The payee is an entity that has a presence in California or is registered to do business with Secretary of State
- If the payee is a registered non-profit with the IRS
- We receive an FTB reduction notice of have a California 588 form waiver for withholding approved by the Franchise Tax Board
- In certain cases, a statement of work is required to certify where work is performed. A California 587 or 590 form (or the IRS Determination Letter for the non-profit entities) may be requested in certain circumstances
- For additional guidance, please refer to FTB Pub 1017
- The state of California does not conform to federal law relating to income protected by U.S. tax treaties. California income is taxable and subject to withholding.
- Non-Payroll payments paid to nonresident aliens during the year will be reported on a 1042-S tax form, which is available online via Glacier around February of the following year.