Medical residents subject to FICA.

• Author: Beavers, James A.
• Position: Federal Insurance Contributions Act

In a unanimous decision, the Supreme Court held that individuals in medical residency programs at teaching hospitals are subject to FICA on the stipends they receive for the work they perform while participating in the medical residency programs.

Background

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The Mayo Foundation for Medical Education and Research (Mayo) offers residency programs to doctors who have graduated from medical school and seek additional instruction in a chosen specialty. These programs train doctors primarily through hands-on experience. Although residents are required to take part in formal educational activities, these doctors generally spend the bulk of their time--typically 50-80 hours a week--caring for patients. Mayo pays its residents annual stipends of over $40,000 and also provides them with health insurance, malpractice insurance, and paid vacation time.

The Federal Insurance Contributions Act (FICA) requires employees and employers to pay taxes on all wages employees receive and defines "wages" to include "all remuneration for employment." FICA defines "employment" as "any service ... performed ... by an employee for the person employing him" but excludes from taxation any "service performed in the employ of ... a school, college, or university ... if such service is performed by a student who is enrolled and regularly attending classes at [the school]" (Sec. 3121(b)(10)). Since 1951, the IRS has construed the student exception to exempt from taxation students who work for their schools "as an incident to and for the purpose of pursuing a course of study" (16 Fed. Reg. 12474). Until 2005, the IRS determined the application of the exception on a case-by-case basis, primarily basing its determinations on the numbers of hours the individual worked and his or her course load.

The Social Security Administration (SSA) also applied a case-by-case approach to the corresponding student exception in the Social Security Act but always held that resident physicians are not students. In 1998, the Eighth Circuit held that the SSA could not categorically exclude residents from student status, given that its regulations provided for a case-by-case approach (Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998)). Following that decision, the IRS received more than 7,000 claims seeking FICA tax refunds on the ground that medical residents qualified as students under Sec. 3121(b)(10).

In December 2004, after the issuance of proposed regulations and public...