All award payments to students must be processed on the Award Request form. The student must check the appropriate box regarding their citizenship status. All Award Request forms must be approved by the Scholarship Coordinator and the Nonresident Alien Tax Specialist. There are two types of award payments: compensatory and noncompensatory
Compensatory award - For an award to be considered wages subject to employment taxes, there must be an employer-employee relationship existing between the one making the award and the recipient of the award. If no such relationship exists, the award will not constitute wages." (Commerce Clearing House, Payroll Management Guide, Paragraph 623, Awards and Prizes). If services are required to receive the award, the individual must be an employee and paid through the payroll system. An example of this type of an award would be if a student spoke at a conference.
This income is reported on a Form W-2 and is subject to 25% withholding tax for U.S. citizens, Permanent Residents, Green Card Holders and Resident Aliens. Nonresident Aliens are subject to 30% withholding tax. This is reported on a Form 1042S. The only way to be exempt from the tax is if there is a treaty between the foreign national's country of tax residency and the U.S. and the recipient is qualified to take advantage of the treaty.
- Non Compensatory Award - Awards to non-employees by an employer are not considered income if the following conditions are met:
- The prize or award was made primarily in recognition of the recipient's past achievements in religious, charitable, scientific, educational, artistic, literary, or civic fields.
- The recipient was selected without any action on his part to enter a contest or proceedings.
- The recipient is not required to render substantial future services as a condition to receiving the prize or award.
- The prize or award is transferred by the payor to a governmental unit or tax-exempt charitable, educational, religious, etc. organization designated by the recipient.
- If the individual receiving the award is an employee in some capacity for the university, the award is paid through the payroll system and will be taxed and reported as if it were a compensatory award." (Commerce Clearing House, Payroll Management Guide, Paragraph 623, Awards and Prizes). An example of this would be if the non-employed student wrote a paper, and unexpectedly received an award for writing the best paper.
If the recipient is not an employee the total income for the year is less than $600, the income is not subjected to withholding, but the recipient must self report the income. If the recipient's total income for the year is more than $600, the recipient will not be subject to withholding, but the income will be reported on a Form 1099.
Non-resident aliens are subject to 30% withholding tax and the income is reported on a Form 1042S. The only exemption for a foreign national is if there is a treaty between the foreign national's country of tax residency and the U.S. and the recipient is qualified to take advantage of the treaty.