Procedure: 601-Tax Reporting and Withholding on Non-Salary Payments
Federal Tax Withholding-Calculation of Amount Withheld
In general, tax should be withheld at the rate of 30% of gross pay. Withholding on scholarships and fellowships is reduced to 14%. One personal exemption is permitted on payments for personal services, scholarships, and fellowships. (U.S. nationals and residents of Canada and Mexico are allowed the same personal exemptions as U.S. citizens). In addition, the portion of a scholarship or fellowship payment which is related to tuition, fees, or course-related expenses is exempt from withholding. Withholding rates may also be reduced according to tax treaties, and many tax treaties entirely exempt scholarship and fellowship payments.
In general, this calculation is made by pre-audit staff or by a division with a delegated pre-audit function. The following examples demonstrating calculation of amounts withheld are presented here for your information only.
Example 1. A royalty is paid in the amount of $1,000 to a resident of Paraguay. The United States does not have a tax treaty with Paraguay and the recipient has not claimed exemption from withholding, so withholding is at the rate of 30%. Accounting Services withholds $300 (30% of $1000) and remits it to the IRS. A check for $700 is mailed for the royalty payment.
Example 2. A royalty is paid in the amount of $1,000 to a resident of Japan. According to the tax treaty between the United States and Japan, royalties are subject to a 10% withholding rate. The recipient has filed form 1001 to claim the lower rate. Accounting Services withholds $100 (10% of $1000) from the payment.
Example 3. A resident of Nigeria performs services for a university department over a period of 10 days. The United States does not have a tax treaty with Nigeria and the recipient has not claimed exemption from withholding. Withholding is calculated as follows:
| Gross pay | $1000.00 |
| Less 1 personal exemption $2700* prorated (10/365 days) |
-74.00 |
| Amount subject to withholding | 926.00 |
| x 30% withholding rate | x .30 |
| Amount withheld | $277.80 |
Example 4. A $2000 scholarship payment is made to a student who is a resident of Brazil. The United States has no tax treaty with Brazil and the student has not claimed exemption from withholding. Withholding is calculated as follows:
| Gross pay | $2000.00 |
| Less 1 personal exemption $2700* prorated (120/365 days) |
-888.00 |
| Less estimated tuition/fees/books | -1000.00 |
| Amount subject to withholding | 112.00 |
| x 14% withholding rate | x .14 |
| Amount withheld | $15.68 |
*Personal exemption amount for 1998. This amount is subject to change each calendar year.
Withholding amounts are calculated based on information provided on the Payment to Individual Report. As the examples indicate, withholding depends on a variety of circumstances. Departments can help assure accuracy of withholding amounts by providing complete information on the Payment to Individual Report.
With each payment, a remittance copy of the voucher is produced by Accounting Services. This document will include a statement to notify the individual that taxes were withheld and remitted to the Internal Revenue Service. A telephone number to contact in case of error will be included.
Procedure: 601-Tax Reporting and Withholding on Non-Salary Payments