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TAX ON FELLOWSHIPS AND GRANT SUPPORT

The following reflects general guidelines and information, and does not constitute tax advise from either UMDNJ or the Graduate School of Biomedical Sciences. Specific fellowships may contain exemptions or exceptions from these general policies. Please contact the UMDNJ Payroll Department, who makes the determination regarding type of compensation, if you have questions regarding withholding of taxes or related issues as they pertain to your support.



Postdoctoral and graduate student stipends paid from NIH grants, which are fee-for-service, are employee "wages." Accordingly, such payments under NIH (and other fee-for-service) grants are subject to reporting on IRS Form W-2, and subject to the withholding of both Federal and New Jersey state income taxes.

Graduate students enrolled in an educational program are exempt from FICA taxation because of a specific statutory exclusion under Internal Revenue Code (IRC) Section 3121(b)(10) for student-employees. Postdocs, while considered students by UMDNJ definition, are not enrolled in an academic program and, therefore, are not exempt from FICA (unless they are supported by a Fellowship [e.g., NIH, NSF] that specifically exempts certain employee deductions.

The question of whether an individual is an employee or an independent contractor (i.e., self-employed) is generally based upon whether the service recipient (e.g., the PI) has the right to exercise a sufficient level of direction and control over the individual worker to suggest an employer-employee relationship. The IRS guidance on students receiving compensation under a fee-for-service scholarship or fellowship grant creates a rebuttable presumption that the student is subject to a significant level of direction and control from the university and, therefore, is the university's employee -- UMDNJ can pretty much assume that postdocs, or any other students receiving compensatory (i.e., fee-for-service) scholarship or fellowship payments are the EMPLOYEES of the university for employment tax purposes.

By comparison, those scholarship or fellowship payments that are not subject to a specific fee-for-service requirement (e.g., stipends from the Graduate School or government fellowships/training grants) and, thus, are noncompensatory, are neither employee wages nor income from self-employment. Rather, the amounts are treated as TAXABLE scholarship or fellowship payments because the grants are not used exclusively for either tuition or "qualified related expenses," for purposes of IRC Section 117. These amounts are reported in box 3 ("Other income") of IRS Form 1099-MISC, "Miscellaneous Income."

Students paid from the GSBS directly or postdocs from specific fellowships are not considered to be working and the University is not required to withhold taxes unless requested. This has certain advantages and disadvantages. Although the paycheck may be somewhat larger than that received by a student paid from a research grant, the amount of the stipend is reported to the IRS on Form 1099 and it is likely that the student will be subject to federal income tax on the stipend payments. Thus, students not having taxes withheld may find that they owe money they no longer have. This is especially true for students with a working spouse. Based on this potential problem, it may be advisable to file a W-4 form and have a minimal amount of money withheld each pay period, giving the same safety feature as for those receiving stipends from a research grant. W-4 forms can be picked up at your campus payroll department.

All of the scholarship and fellowship payments should be considered under a two-step analysis:

(1) Are the payments fee-for-service?

If the payments are fee-for-service, then the amounts are employee wages, subject to income tax withholding and reporting on IRS Form W-2.

OR

(2) If the payments are not fee-for-service, is their expenditure restricted (in whole, or in part) to either tuition or "qualified related expenses," for purposes of IRC Section 117?

If the payments are not fee-for-service, then that portion of the payments that are not restricted to expenditure on either tuition "qualified related expenses," for purposes of IRC Section 117 is subject to reporting as a noncompensatory payment in box 3 ("Other income") of IRS Form 1099-MISC. Recipients would be required to substantiate qualifying expenditures to the university in order to treat all or a portion of their grant as nontaxable and, therefore, not subjec t to re porting on IRS Form 1099-MISC.

For questions or problems related to payroll issues, send e-mail to payroll_help@umdnj.edu.



New Jersey State Tax on Scholarships and Fellowships

GSBS or Postdoctoral Fellowships (e.g., NRSA) are not New Jersey State taxable or reportable because they satisfy three necessary criteria:

1. Their primary purpose is to further the recipient's education or training; and
2. They are not payments for services rendered; and
3. They are not for the benefit of the grantor.

Details can be found on printed page 33 (24 online) of the following 2004 New Jersey Department of the Treasury document under Scholarships and Fellowships.



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