Community Exchange

Hello colleagues,

We are seeking insight into how other institutions operationalize the taxation of nonresident alien (NRA) students on scholarships when a portion is applied to unqualified education expenses, even when no excess scholarship taxable income is reported on Form 1098‑T (i.e., Box 5 does not exceed Box 1).

In our scenario, although total scholarships do not exceed qualified tuition and related expenses for 1098‑T reporting purposes, a portion of the award is designated for and applied to unqualified expenses (e.g., room, board, insurance). As a result, that portion is taxable and subject to NRA withholding.

We would appreciate your perspective on the following:

• How do you operationally identify and track the portion of scholarships applied to unqualified expenses for NRA students when there is no excess reported on the 1098‑T?
• How do your student information, financial aid, or tax systems support this distinction between qualified vs. unqualified expense application?
• How you handle withholding when no cash is available (e.g., billing the student, gross-up, or use another methodology)?
• Have you encountered audit or compliance challenges in this area, and if so, how have you addressed them?

Thank you in advance for your input.

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Sonia Singh
Managing Director
The George Washington University
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Hi Sonia,

Our student financial services office tracks the portion of scholarships ( room and board) above qualified tuition on a google spreadsheet and shares this information with our Finance office every semester when student aid is awarded.  There have been some situations were the student was not aware of the tax withholding and therefore we have grossed up the payment. The appropriate departments are now aware of the tax implications and plan to educate future recipients prior to accepting the scholarship. For late withholding to the IRS, we have had to unfortunately pay a penalty.

A great resource for NRA withholding questions is the listserv below if you aren't already aware.

ALIENS-L@listserv.utk.edu

I hope this helps,

Angela Sharp

Financial Accounting Manager

University of Puget Sound

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Angela Sharp
Financial Accounting Manager
University of Puget Sound
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Hi Sonia,

We developed a process a few years ago where the departments that want to award funds for other than tuition and fees:

1. Reach out to the university treasurer for a form the international student has to complete, then the treasurer indicates at what percentage the student's tax withholding should be.
2. Financial aid requests a Banner detail code be created for the award (naming format indicates percentage of tax withholding).
3. Controller's Office creates the detail code, and adds detail code, the tax withholding percentage, and the corresponding tax withholding detail code to a table used by a in-house developed job that is run just prior to refunding, and at the end of the night. Tax withheld is posted to a liability account code.
4. The in-house job analyzes the Banner TBRACCD table for the current processing day to see if there are any taxable awards disbursements, and calculates tax withholding based upon percentage in table and posts tax withholding transaction to the student account. The award and tax are posted the same day so that the student is only refunded the difference.
5. The job still has some minor flaws, so we also daily run a query to verify that the appropriate tax withholding is being applied. 
6. Treasurer monitors the tax withholding liability account code to submit required payments to the IRS in a timely manner.

Hope this information helps. Since all universities are required to withhold taxes on NRA students, I was surprised that our ERP didn't have an automated solution.

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Leah Quinlivan
Manager, Student Receivable Accounting
Kent State University
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We have a very similar process to other campuses, on the student financial side we track using specific Item Types so it can be more easily pulled on a report. The whole process is highly coordinated among different departments but we use SmartSheet, we have a workflow process where one person can provide the data we can see the qualified and non-qualified amounts, track the tax for when we make the payments and use SprinTax to track the tax treaties. The SmartSheet also helps us double check the 1042-S figures annually but the workflows enable us to notify the departments that need to be notified if there happens to be an issue. 

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Alberto Contreras
Director, Accounts Payable & Travel
California State University, Fullerton
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