Payments made by the University are subject to reporting and withholding as determined by applicable federal and state tax laws and regulations. Departments are not authorized to implement procedures that deviate from those set forth in this Policy. Any exception to this Policy requires approval by both the Associate Vice President for Accounting and Business Services and the Director of Internal Audit and Tax Compliance.
AP SYSTEM PAYMENTS
This section summarizes the withholding and reporting requirements for payments made to individuals through the AP System. Payments to Non-Employees
Compensation-related payments made to a non-employee for performing independent personal services are reportable on IRS Form 1099-MISC if the total payments made to the individual are $600 or more for the calendar year. Such payments include consulting, speaking and performance fees, honoraria, and similar service payments. Payments for non-cash gifts, prizes, and awards presented to a non-employee and payments of other income made to a non-employee of at least $600 are also reportable on Form 1099-MISC. These payments are not subject to withholding provided that the individual has furnished Accounting and Business Services with a valid taxpayer identification number (TIN), e.g., social security number. If a payee fails to provide his or her TIN, or the TIN provided is incorrect, then the payment will be subject to backup withholding at the rates of 28% (federal) and 7% (California).
Non-wage service payments made to nonresidents of California are reportable on FTB Form 592-B and are subject to withholding of 7% if the total payments made to the individual are more than $1,500 for the calendar year. See FTB Publication 1017, Resident and Nonresident Withholding Guidelines
.Payments to Employees
Any taxable payment made to an employee or on behalf of an employee is subject to withholding and reporting as provided below. In general, such payments should be paid through the payroll system rather than the AP system. However, if it would not be possible to make a payment through payroll, the details of the payment must be provided to Payroll Services in a timely manner so that applicable taxes may be withheld from the employee’s regular wages.
PAYROLL SYSTEM PAYMENTS
All salary and wage payments made to an employee are reportable on IRS Form W-2 and are subject to withholding of applicable income and FICA taxes. Fringe benefits provided to an employee (or a member of the employee’s family) are also taxable, unless specifically excluded from an employee’s wages under the Internal Revenue Code. Taxable benefits include, but are not limited to, certain travel and moving expense reimbursements, group-term life insurance coverage in excess of $50,000, tuition remission in excess of $5,250 for graduate-level courses that are not job-related, etc.
For additional information regarding employee wage and fringe benefit payments, see IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits
.Employees Working Out-of-State
The Out-of-State Income Tax Withholding Form
must be completed whenever an employee is hired or assigned to work in a state other than California. The completed form should be submitted by the employee to the Office of Internal Audit and Tax Compliance at least ten (10) business days before the out-of-state assignment begins. Based on the information supplied on the form, Internal Audit and Tax Compliance will determine whether the employee will be subject to withholding in the state where he or she will be working.
STUDENT SYSTEM PAYMENTS
This section summarizes the withholding and reporting requirements applicable to payments made to students for scholarships, fellowships, and other forms of gift aid. Payments made to or on behalf of a student for such financial assistance, while initiated in the student system, are disbursed through the AP system. All student assistance payments must originate in the student system so that they are correctly reported on IRS Form 1098-T, which is provided to students for purposes of claiming the education tax credits and deductions.
Non-Taxable Scholarships and Fellowships
A scholarship or fellowship is not taxable to the extent that the funds provided under the grant are used for “qualified” expenses and there is no expectation that the recipient perform any substantial services (i.e., either past, present, or future services) in return for receiving the grant. The portion of a grant related to the performance of services represents wages, which must be paid to the recipient through the payroll system.
Assuming that a scholarship or fellowship incudes no service requirement, any funds used for qualified expenses are not taxable. Qualified expenses include required tuition, fees, books, supplies, equipment, and other mandatory fees for classes or enrollment. The amount used to pay required health insurance premiums in order for a student to be enrolled is also considered a qualified expense and is not taxable.
Taxable Scholarships and Fellows
Any portion of a scholarship or fellowship used to pay for “nonqualified” expenses such as room and board, travel, moving, and other living expenses is taxable to the recipient. This would be the case regardless of how the funds were paid, i.e., directly to the student or on his or her behalf. See IRS Publication 970, Tax Benefits for Education.
The taxable portion of a non-service scholarship or fellowship provided to a U.S. citizen or resident alien is not subject to withholding. The IRS recommends, however, that colleges and universities inform students in writing if part of their scholarship or fellowship is taxable. Appendix B includes a summary of the general tax rules governing scholarship and fellowship grants, including the Form 1098-T reporting requirements, which may be provided to students.
PAYMENTS TO FOREIGN INDIVIDUALS
The University uses the GLACIER Nonresident Alien Tax Compliance System to determine the federal tax treatment of payments made to its foreign students, employees, and other visitors who are temporarily in the United States to work or study on campus. Income paid to a nonresident alien and the withholding on such income is reportable on IRS Form 1042-S. For additional information, see Nonresident Alien Payments Policy.
A violation of any portion of this Policy may result in disciplinary action, up to and including termination of employment and/or legal action.