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Guest Post by Heather Pesikoff
In a unanimous decision, the Supreme Court recently ended the multi-decade debate over whether medical residents are eligible for the student FICA exception. It ruled that the exception is not applicable, medical residents are employees and therefore subject to Federal Insurance Contributions Act (FICA) taxes.
Student FICA Exception
The IRC section 312(b)(10) student exemption excepts employers from withholding and paying FICA taxes on services performed in the employ of a school, college or university if those services are performed by a student who is enrolled and regularly attending classes. The IRS amended the regulations under this provision in 2004 to provide that an employee is a student only if the services that he performs are incidental to his education. The regulations further provide that an individual who normally works 40 hours or more each week is considered a full-time employee and thus ineligible for the student FICA exemption.
The Court examined the student FICA exemption as it relates to medical residents and gave deference to a Treasury Department regulation.
Potential Impact on Treasury
Reportedly, as a result of this landmark decision, an estimated $700 million a year of revenue will be collected.
Student Wages Paid Prior to April 2005
On March 2, 2010, the IRS made an administrative determination to accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods before April 1, 2005, when the IRS regulations went into effect. The IRS has been contacting hospitals, universities and medical residents who previously filed FICA refund claims for these periods with more information and procedures.
FICA taxes are comprised of two separate taxes, social security and Medicare taxes that are paid on wages earned for services performed. Employers must withhold and pay their employees' share of the FICA taxes and also pay the employer share. It is imperative that in light of this recent decision, employers withhold on medical resident wages/stipends. Failure to do so may result in significant exposure.
It is important to note that FICA taxes are due only on residents' wages/stipends paid after April 1, 2005.
We note that before undertaking any action, you should consult with your tax advisor. Any tax advice in this alert is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties.