The University of ArizonaThe University of Arizona
Financial Policies & ProceduresFinancial Policies & Procedures
 

13.01 Introduction to Methods of Student Payments

 

Purpose:To provide guidelines for classifying payments made to students as scholarships, salaries/wages, consultant fees and reimbursements, ensuring compliance with Internal Revenue Service (IRS) reporting and withholding requirements.

NOTE: There may be additional requirements when making payments to nonresident aliens, refer to 9.16, Payments to Nonresident Aliens, for more information.

 

Policy Owner:Financial Management

Definitions | Payment Type and Procedure Chart


  1. Many payments to students, graduate students, postdoctoral fellows and others are commonly referred to as stipends. However, the term stipend does not provide specific enough guidance for determining the appropriate procedures for processing these payments and for determining appropriate IRS reporting and withholding requirements. Therefore, these payments must be more specifically classified as scholarships, salaries/wages, consulting fees or reimbursements. If you have any classification questions, please contact the Tax Manager

Definitions

  1. Scholarships (also known as Fellowships): The IRS regulations regarding the definition of scholarships is contained in Section 117 which states:

    Section 117(a) GENERAL RULE. - Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(a)(ii).
    Section 117(b) QUALIFIED SCHOLARSHIP. - For purposes of this section:
    (1) IN GENERAL. - The term "qualified scholarship" means any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.
    (2) QUALIFIED TUITION AND RELATED EXPENSES. - for the purposes of paragraph (1), the term "qualified tuition and related expenses" means -
      (A) tuition and fees required for the enrollment or attendance of a student at an educational organization described in section 170(b)(1)(A)(ii), and
      (B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization.
    Section 117(c) LIMITATION. - Subsections (a) and (d) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction.

    The University interprets these IRS regulations as follows: A scholarship must possess two characteristics:
    1. The student (as opposed to the University) primarily benefits from the activity performed, AND
    2. Teaching, research, or other services cannot be required as a condition to receive payment. The University classifies teaching and research in two ways:
      1. Training related - any teaching or research associated with a training grant. The university believes that Congress did not intend Section 117(c) to apply to teaching or research training grants.
      2. Service related - any teaching or research which is not involved in training is service oriented and Section 117(c) does apply.
    If a payment is made to a student who primarily benefits from the teaching or research required for a training grant, then the payment should be treated as a scholarship. If a payment is made to a student who primarily benefits and is required to perform teaching or research services, then the payment should be treated as salaries/wages.

    NOTE: Whether a payment is made directly or in the form of a reimbursement for books, supplies, room, board or travel, it should be treated as a scholarship as long as it meets this definition.
  2. Primary Beneficiary: A student is considered to be the primary beneficiary if the emphasis of the duties performed is to provide training rather than to render services in return for payment. Several factors must be considered when determining the primary beneficiary. For example, if the desired outcome of the project is the training of the individual student, rather than useful results, then the student would be the primary beneficiary. The rate of pay is another consideration. If the department would hire another individual at a higher rate than the student to perform the same tasks and not provide training, then the student could be the primary beneficiary.
  3. Salaries/Wages: All remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. If salaries/wages are paid to an employee, applicable income and FICA taxes must be withheld. "Employer/employee relationship" as defined below should be used as a basis for determining whether an individual should be classified as an employee. Clarifications regarding this definition should be directed to the Compensation and Benefits Office for a ruling.
  4. Consulting Fees: Payment for services made to independent contractors. An independent contractor is an individual who performs services for the University, but whose relationship with the entity is not an "employer/employee relationship" (defined below). Payments for fees made to independent contractors must be reported to the Internal Revenue Service on Form 1099 which are prepared by Payroll Operations.

    In general, if an individual is subject to the control or direction of another merely to accomplish a result, but not as to the details and means of accomplishing the result, he is an independent contractor. That is, the entity requesting the service has the right to tell an independent contractor what to do, but not how to do it.

  5. Employer/Employee Relationship: An employer/employee relationship exists when a workers actions are subject to the direction and control of the University with regard to the results of the work, and the details of when, where and how the work is to be done. Some of the characteristics usually implied in an employer/employee relationship include permanency of employment, maintenance of specific work hours, compensation by the hour, week, month, or year (rather than by the "job"), the right of the employer or employee to terminate employment without incurring liability, and the furnishing of tools, equipment, materials and a place in which to work (none of these characteristics stand alone in determining the relationship). The IRS normally presumes that the worker is an employee and thus the University has the responsibility to prove otherwise.
  6. Student (as defined for this policy only): An individual enrolled in course(s) for credit. Students will have all scholarship payments applied to their individual accounts.
  7. Non-University of Arizona Student: Individuals who are participating in study or training at the University of Arizona who do not have a University Student ID and/or Bursar Account.
  8. Postdoctoral Fellow: A person who has received a doctoral degree and is pursuing additional training in research.
  9. Clinical Fellow: A person who has received an advanced degree (Ph.D. or equivalent) and/or professional degree in a clinical discipline and is pursuing additional training in research.
  10. Expense Reimbursement: Payment for expenses incurred on behalf of the University. While expense reimbursements are applicable for employees, consultants, and students; students can be reimbursed either for business or school related activities (for example, books). All school related reimbursements should be treated as scholarships and must be approved by the Office of Scholarships & Financial Aid.

    Travel reimbursements can be either school related or business related, depending on the purpose of the event and the student’s participation in the event.
    1.  If the students provide services* that primarily benefit the University of Arizona, the expenses are business related. *Related services include submittal and/or presentation of a research paper, participation in round table discussions, or sharing knowledge or technology by other means.
      Example: A student travels to attend an academic conference, and presents her research paper on behalf of the University. As her contribution to the conference is affiliated with the University, she is providing services that primarily benefit the University. Therefore, the expenses are business related.
    2. If the students do not provide any services, or provide services that primarily benefit the students themselves, then the travel expenses are school related.
      Example 1: A student travels to attend a workshop for educational purposes related to his own study. The student does not provide any service or contribute to the workshop on behalf of the University. Therefore, his travel expenses are school related.
      Example 2: A student travels to attend a training event/program, and she presents and participates in the group discussion on the subject matter. As her participation is primarily for her own training, therefore primarily benefits herself, her travel expenses are school related.
    If departments consider the travel expense to be business related, documentation detailing the purpose of the event and the student’s involvement in the event must be submitted to FSO Accounts Payable for review. If FSO Accounts Payable determines that the travel expenses do not qualify as business related, the reimbursement must be treated as school related and processed via the Office of Scholarships & Financial Aid.

Payments

  1. Review the following chart to determine the type of payment and the appropriate processing procedures.
    Payment TypePayment Procedure
    Scholarships/Fellowships:
    • For currently enrolled students, follow section 13.10
    • For Non-University of Arizona students or students who have graduated use the Disbursement Voucher. 
    • For a Postdoctoral Fellow, follow section 13.31, and use the Disbursement Voucher.
    Salaries/Wages:Follow Payroll procedures.
    Consulting Fee:
    Reimbursements:
    • Business related expenses, use the Disbursement Voucher.
    • School related expense reimbursements are classified as scholarships (see #11 above).