The issue of whether amounts paid to medical residents are wages subject to the Federal Insurance Contributions Act (FICA) taxes has been a source of confusion and controversy for decades. The underlying issue has always been whether a medical resident was more akin to an employee or a student who is simply pursuing a course of study. For tax periods prior to April 1, 2005, the IRS was more willing to allow medical residents to be treated as students whose stipends would not be subject to FICA. That changed in 2005. Regulations that became effective on April 1, 2005 provided that regardless of whether a medical resident was deemed to be pursuing a course of study, if the resident's normal work schedule is 40 hours or more a week, the resident will be treated as an employee and his/her wages would be subject to FICA (the New Student Exception Regulations). The validity of the New Student Exception Regulations was immediately challenged by a number of hospitals and universities, and the District Court of Minnesota held that the New Student Exception Regulations were invalid.
Given the District Court of Minnesota decision and earlier court decisions dealing with whether medical residents are subject to FICA taxes, universities and hospitals filed FICA tax refund claims to recover these taxes paid with respect to their former medical residents. These recoveries, at least for payroll periods after March 31, 2005, would no longer be possible. This is because on January 10, 2011, in Mayo Foundation for Medical Education & Research v. United States, a unanimous U.S. Supreme Court upheld the validity of the New Student Exception Regulations treating medical residents who work 40 or more hours per week as full-time employees subject to FICA taxes. Given that the New Student Exception Regulations became effective on April 1, 2005, no more FICA tax refunds on payments made to medical residents would be paid for tax periods ending after that date. Therefore, universities, hospitals, and other organizations paying medical residents should continue to withhold the employee’s portion of FICA taxes and remit the employer’s and employee’s shares of FICA taxes to the IRS.
The Supreme Court decision does not affect services performed by medical residents before April 1, 2005. In March, 2009, the IRS decided to accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods ending before April 1, 2005, when the New Student Exception Regulations went into effect. The IRS has contacted many hospitals, universities, and medical residents who had filed timely FICA refund claims for these periods regarding perfecting refund claims and/or obtaining a FICA tax refund. We anticipate that the IRS will continue to work with the taxpayers to refund appropriate FICA taxes on payments made to medical residents for periods ending before April 1, 2005.
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Kenneth R. Appleby
Robert E. Goldstein
San Diego, California
Zhu Julie Lee