Basically, the amount paid directly to the school is considered a scholarship. After entering the 1098-T exactly as printed, follow up screens will ask you for scholarships not included in box 5 of the 1098-T. enter the amount your work paid directly to the school. Then you'll be asked for qualified education expenses not included in box 1 of the 1098-T. enter the amount you paid for books and lab fees there.
The difference is taxable income to you and will be included in the total income on line 7 of your 1040, with the annotation "SCH" next to it. The "SCH" indicates that some of the income included in box 7, is taxable scholarship income.
