Is Your Stipend a Scholarship or a Salary? How Wording in Your Offer Letter Changes Your US Tax Treatment

The difference between receiving a "scholarship stipend" and a "research assistant salary" may appear to be a matter of administrative terminology. For US tax purposes, however, that distinction determines which form you receive, how much is withheld, whether FICA applies, and how you report the income on your return. Two graduate students at the same university earning identical dollar amounts can face completely different tax outcomes depending entirely on how their department worded the offer letter. 

Key Takeaways

• Is a stipend considered taxable income in the US? It depends on how it is classified. Stipends covering tuition, required fees, books, and required supplies are excluded from gross income under IRC Section 117. 
• How does the IRS classify stipends vs. scholarships? The IRS looks at the substance of the payment, not the label. If payment requires the recipient to perform services (teaching, research, grading), it is compensation taxable as wages.
• Do stipends require a W-2 or a 1042-S? Compensation for services is reported on Form W-2. Non-service fellowship and scholarship income paid to nonresident aliens is reported on Form 1042-S with income code 16.
• Do international students pay tax on stipends? Yes, if the stipend covers non-qualified expenses (anything beyond tuition and required fees). 
• Does the wording in an offer letter actually matter? Yes, significantly. Universities use offer letter language to determine which payroll system routes the payment, which form is issued, and what withholding applies. 

Introduction

Graduate students, postdoctoral researchers, and visiting scholars receive funding through a bewildering variety of labels: stipends, fellowships, assistantships, grants, training allowances, living allowances, research compensation, and tuition waivers. Universities use these terms inconsistently, and the terminology in an offer letter often reflects departmental convention rather than IRS guidance.

The IRS does not care what a payment is called. What it cares about is what the payment is for. A payment made in exchange for services rendered is wages, reportable on Form W-2, subject to income tax withholding and potentially FICA, and taxed at ordinary income rates. A payment made to support a student's education without requiring services in return is a scholarship or fellowship, subject to a different set of inclusion and exclusion rules under IRC Section 117.

The distinction sounds straightforward until you encounter the reality of how universities actually structure graduate funding. Many students receive a single dollar amount described as a "stipend" that is simultaneously their teaching assistant salary, their research support funding, and their living allowance, all blended into one payment with one offer letter. Disentangling the components and understanding the tax treatment of each is what this guide addresses.

The Core Tax Rule: IRC Section 117

The foundational rule for scholarship and fellowship taxation is IRC Section 117, which provides a gross income exclusion for qualified scholarship amounts received by degree candidates.

Under Section 117, the following are excluded from gross income (not taxable):

• Amounts used for tuition and required enrollment fees
• Amounts used for fees, books, supplies, and equipment required for courses

The following are included in gross income (taxable), regardless of what they are called:

• Amounts used for room and board
• Amounts used for travel
• Amounts used for optional equipment not required for a specific course
• Amounts used for living expenses of any kind
• Any amount received as payment for teaching, research, or other services required as a condition of receiving the scholarship or fellowship

This last category is the most consequential. If your funding comes with a condition that you teach undergraduate sections, grade papers, run lab experiments, or provide any other service to the university, the IRS treats the portion attributable to those services as compensation for services, not as a scholarship. That compensation is wages, taxable in full, and must be reported on Form W-2.

The Practical Test: Services Required or Not?

The single most important question to ask about any stipend payment is: Am I required to do something in exchange for this money?

The critical point is that a single offer letter can contain multiple payment types that must be separated and reported differently. A graduate student who receives a $35,000 annual package comprising a $15,000 teaching assistantship and a $20,000 fellowship stipend for living expenses has two distinct income streams with two different tax treatments, even if the university deposits them as a single monthly payment.

How the Offer Letter Wording Drives the Tax Outcome

Universities route payments through different systems depending on the language in the offer letter, and that routing determines which tax form is generated.

Scenario 1: "Teaching Assistantship Salary"

If the offer letter states the student is appointed as a Teaching Assistant and will receive a salary of $18,000 for the academic year in exchange for teaching two sections per semester, the university routes this through its employee payroll system. The student receives a Form W-2 at year-end. Federal income tax is withheld from each paycheck. For nonresident alien F-1 students within the 5-year exempt period, FICA is not withheld. The $18,000 is fully taxable as wages.

Scenario 2: "Fellowship Stipend for Living Support"

If the offer letter states the student is awarded a fellowship of $18,000 for the academic year to support their doctoral research, with no service requirement attached, the university routes the payment through its financial aid or accounts payable system. The student receives a Form 1042-S (if a nonresident alien) or no tax document at all (if a US citizen or resident alien). Federal income tax may or may not be withheld. The $18,000 is taxable as fellowship income but is reported differently from wages.

Scenario 3: The Blended Offer Letter

If the offer letter states the student will receive "a graduate student stipend of $28,000 including a research assistantship component," without clearly separating the service-based component from the fellowship component, the tax treatment becomes ambiguous. Universities in this situation often issue a single Form W-2 for the full amount, treating it all as compensation. Whether that is correct depends on whether a genuine service requirement exists for the full amount or only for a portion.

This ambiguity is why offer letter wording matters so much. Students who believe they have received a fellowship but are issued a W-2 may be paying FICA on income that should be exempt, or vice versa.

Tax Treatment for Nonresident Alien Students

For nonresident alien F-1 and J-1 students, the distinction between service and non-service income has additional significance because the withholding rates, forms, and treaty exemption pathways differ.

Compensation for Services (W-2 Income)

Teaching and research assistantship wages paid to nonresident alien students are:

• Subject to federal income tax withholding at graduated rates
• Exempt from FICA (Social Security and Medicare) during the first 5 calendar years of F-1 or J-1 status
• Reported on Form W-2
• Taxable as effectively connected income on Form 1040-NR

Non-Service Fellowship and Scholarship Income (1042-S Income)

Taxable fellowship stipends and non-qualified scholarship amounts paid to nonresident alien students are:

• Subject to 14% federal withholding for students on F, J, M, or Q visas under IRC Section 1441
• Reduced to a lower rate or fully exempt under applicable tax treaty provisions (claimed on Form W-8BEN at the time of payment)
• Reported on Form 1042-S with income code 16 (scholarship or fellowship grant)
• Reported on Form 1040-NR, Schedule 1, Line 8r

The 14% withholding rate versus the graduated withholding on W-2 wages is a meaningful financial difference, particularly for students with large fellowship stipends. From a student tax perspective, a student receiving a $25,000 non-service fellowship stipend will have $3,500 withheld at 14%, whereas a student receiving the same amount as wages would have withholding calculated at their marginal rate. Under many US tax treaties, the 14% rate is further reduced or eliminated on fellowship income for nonresident students, making it an important consideration when planning your student tax obligations.

Tax Treatment for US Citizens and Resident Aliens

For US citizens, permanent residents, and resident aliens (including F-1 students who have transitioned to resident alien status), the rules differ in two important ways:

No 1042-S: Fellowship income paid to US citizens and resident aliens is not reported on Form 1042-S. Universities are not required to issue any tax document for non-service fellowship income paid to US persons. This means many graduate students receive fellowship stipend payments throughout the year with no withholding and no year-end form to remind them that the income is taxable.

Self-reporting obligation: US citizen and resident alien fellowship recipients are responsible for reporting taxable fellowship income on Form 1040, Schedule 1, Line 8r (Scholarship and fellowship grants not reported on Form W-2). This income flows to Form 1040, Line 8, as other income. No withholding means no offset at filing time, which is why many PhD students face a significant unexpected tax bill in April.

Estimated tax payments: Because universities generally do not withhold on fellowship stipend income for US persons, recipients who expect to owe $1,000 or more in federal income tax should make quarterly estimated tax payments using Form 1040-ES to avoid underpayment penalties.

What the Offer Letter Should Clearly State

The clearest offer letters from a tax perspective explicitly separate:

1. Service-based compensation (teaching assistantship, research assistantship): states the specific duties, hours per week, and compensation amount. Routed through payroll. Results in W-2.
2. Non-service fellowship support (living stipend, training allowance): states that no services are required in exchange for the payment and the amount is for educational support. Routed through financial aid. Results in 1042-S for nonresidents or no document for US persons.
3. Tuition waiver: states that tuition charges are waived and identifies the amount. Excluded from gross income under Section 117 and generates no tax obligation.

When a single offer letter blends all three without differentiation, the university defaults to a single classification that may be incorrect for some or all components. Students who believe their offer letter misclassifies their payment should raise the issue with their department's financial administrator or the university's tax office before the payment begins, not after the tax year ends.

Common Mistakes in Stipend Tax Reporting

Not reporting fellowship income because no tax form was received: US citizens and resident aliens receiving fellowship stipends often receive no W-2 or 1099. This does not mean the income is not taxable. Taxable fellowship amounts must be self-reported on Schedule 1 regardless of whether a form was issued.

Reporting 1042-S income as wages: Some nonresident alien students enter their 1042-S income code 16 amount in the wages line of Form 1040-NR rather than Schedule 1, Line 8r. This produces incorrect tax calculations and misrepresents the nature of the income.

Failing to claim treaty exemptions on fellowship income: Nonresident alien students from treaty countries who do not submit a Form W-8BEN to their university claiming treaty benefits on fellowship income will have 14% withheld when they may be entitled to a full or partial exemption. The correct time to claim the exemption is before payment, not on the tax return.

Paying FICA on non-service fellowship income: Fellowship stipends paid for non-service academic support are not subject to FICA. If a university's payroll system routes fellowship payments through employee payroll and withholds FICA, that withholding is incorrect and should be recovered through the employer or through Form 843.

Assuming the tuition waiver is always tax-free: Tuition waivers provided to employees (not students) as a condition of employment may be taxable above the annual Section 132(d) exclusion limit of $5,250 for 2026. Graduate teaching assistants who receive tuition waivers tied to their employment relationship, not their student status, may have a taxable portion.

How NSKT Global Can Help

Correctly classifying stipend and fellowship income, applying treaty benefits, determining the right tax form, and ensuring quarterly estimated tax obligations are met requires expertise that most general tax preparers do not apply consistently to graduate student and research fellow situations.

NSKT Global provides comprehensive tax services for students, fellows, and researchers receiving stipend income in the US, including:

• Classification analysis of offer letter language to determine whether payments are compensation for services, non-service fellowship income, or qualified scholarship amounts excluded under Section 117
• Form 1040-NR preparation for nonresident alien students with 1042-S fellowship income and W-2 assistantship wages, including correct placement of each income type on the return
• Treaty exemption review and Form W-8BEN preparation for nonresident alien students eligible for reduced withholding on fellowship income
• Form 1040 preparation for US citizen and resident alien fellowship recipients, including Schedule 1 reporting of non-W-2 fellowship income
• Quarterly estimated tax payment calculation using Form 1040-ES for fellowship recipients with no employer withholding
• FICA refund claims via Form 843 for students who had Social Security and Medicare incorrectly withheld on non-service fellowship payments
• State income tax return preparation for fellowship and stipend income in all applicable states

Whether you are a first-year PhD student trying to understand your offer package, a postdoctoral researcher navigating a multi-source funding arrangement, or an international scholar whose fellowship withholding does not match your treaty entitlement, NSKT Global provides the expertise to file your return accurately and recover any over-withheld amounts.

FAQs

If my fellowship covers both tuition and living expenses, is the entire amount tax-free?
No. Only the portion applied to tuition and required fees is excluded under IRC Section 117. The portion covering living expenses, room and board, or travel is taxable income and must be reported, either on Form 1040-NR for nonresident aliens or on Schedule 1 of Form 1040 for US citizens and resident aliens.

My university did not send me any tax form for my fellowship. Does that mean it is not taxable?
Not necessarily. US universities are not required to issue a W-2 or 1099 for non-service fellowship income paid to US citizens and resident aliens. The absence of a tax document does not eliminate the reporting obligation. You are responsible for identifying and reporting taxable fellowship income on your return regardless of whether a form was issued.

Can I deduct tuition paid from my taxable fellowship stipend?
The American Opportunity Tax Credit and the Lifetime Learning Credit may be available to offset tuition expenses for eligible students. However, you cannot use the same tuition dollars to both exclude fellowship income under Section 117 and claim an education credit. The tax benefit coordination rules require careful calculation to determine the optimal allocation of qualified education expenses between the exclusion and the credit.

I received both a W-2 and a 1042-S from the same university. Is that correct?
Yes, this is common and correct when you receive both service-based compensation (assistantship wages on W-2) and non-service fellowship income (stipend on 1042-S with income code 16) from the same institution. Each income type is reported separately on your Form 1040-NR using the correct line for each.