Common Income Types (Students)

Service and Non-Service Income

Income may be received in exchange for services. Service payments can be either for employees or non-employees (e.g. independent contractors). The IRS has specific rules around personal services performed in the U.S. Other income may be received without the performance of services. This is referred to as non-service income. Non-service payments can still subject to federal tax withholding.

 

Compensation/Salaries/Wages

Compensation represents amounts paid for services rendered. This includes payments received in exchange for performing services as teaching assistants and research assistants at MIT. These payments are processed through VPF HR/Payroll.

Service income, classified as employee

• The IRS taxes compensation at marginal graduated rates. This means that income earned over certain thresholds is taxed at progressively higher rates.
• Income taxes usually amount to about 14 percent of total income but may be as high as 30 percent.

 

Scholarship/Fellowship/Grant/Stipend

Non-service income

Grants are payments given to an eligible grantee, which may be a student, MIT affiliate or other organization, for a designated purpose. Grants include the payment types listed below, as well as a few others. It is important to determine the specific type of grant in order to ascertain the proper taxability and reporting requirements.

Stipend is a general term that is not specifically defined by the IRS. Stipends may refer to any or multiple payment types. Therefore, you will need to determine the appropriate payment type as defined below.

Scholarships are amounts paid or allowed to a student for the purpose of study. Scholarship funds are intended to offset the cost of a student’s education for an upcoming or current academic year. Amounts paid by degree candidates for qualified expenses such as tuition, fees, and expenses required for coursework are not considered taxable income to the recipient. Conversely, amounts paid for non-qualified expenses such as room and board must be included in gross income and taxed appropriately.

Fellowships are amounts paid or allowed to an individual for the purpose of study or research. At MIT, fellowship payments are often referred to as “grants” or “awards” but if these payments are earmarked for study or research, they may be considered fellowships. Amounts paid by degree candidates for qualified expenses such as tuition, fees and expenses required for coursework are not considered taxable income to the recipient. Conversely, amounts paid for non-qualified expenses such as independent research travel expenses are included in taxable gross income. 

• Targeted grants are amounts issued for activities undertaken in the public interest, not primarily for the private financial benefit of a specific person(s). These amounts are generally not taxable to the recipient.
• If the fellowship requires certain services to be performed, it may be partially compensation income.

• Withholding tax will not apply to qualified scholarship/fellowship income for a degree candidate. A qualified scholarship means any amount paid to an individual as a scholarship or fellowship grant to the extent that, in accordance with the conditions of the grant, the amount is to be used for the following expenses:
  • Tuition and fees required for enrollment or attendance at an educational institution.
  • Fees, books, supplies, and equipment required for courses of instruction at the educational institution.

Visit the IRS website to learn more about withholding tax.

• Nonresident aliens on an F, J, M, or Q visa receiving non-qualified scholarship/fellowship income: 14 percent withholding tax applies on non-service fellowship/scholarship income in the absence of claimed tax treaty benefits. A 30 percent withholding tax rate applies to other visa types. The income and withholding amount will be reported on a Form 1042-S issued by MIT.

Visit the IRS website to learn more about the tax rules for scholarship/fellowship income.

• Resident aliens receiving scholarships/fellowships (including funds that exceed tuition and course related fees): Withholding tax will not apply, but the payments may still be subject to taxation. MIT will not issue a tax document (W-2, 1042-S, 1099-MISC) to the individual, but the information may still be reportable to the IRS and the individual should keep personal records of this amount.
   

Royalty/Prize/Award

Royalty: A royalty payment is a payment for the right to use some form of intangible property (e.g. copyright, patent).

Prizes and awards are amounts paid in recognition of an outstanding achievement or winnings in a competition, raffle, or other contest. When paying a prize or award, it is generally for a past performance. However, if the amount is intended for use in future research or study, the payment may be more properly categorized as a scholarship or fellowship.

• Exceptions – Tangible personal property given to employee for length of service or safety.  See the restrictions at https://www.irs.gov/pub/irs-pdf/p5137.pdf.
• Cash or gift cards are always taxable.

A 30 percent withholding tax rate applies in the absence of claimed tax treaty benefits.