In general, the IRS (and the Social Security Administration (SSA)) has treated medical residents as employees, withholding Federal Insurance Contributions Act (FICA) taxes from their salaries. At the same time, however, the Internal Revenue Code includes an exception from FICA taxes for services performed by student-employees enrolled in institutions of higher learning and regularly attending classes. The question of whether services performed by medical residents qualify for the student FICA exception (and therefore provide employers with an opportunity for claiming refunds of FICA taxes) has arisen.
DETERMINING A MEDICAL RESIDENT'S "EMPLOYER"
The first step in resolving this issue is deciding who is the resident’s common-law employer. (This is not automatically the entity that pays the resident.)
The dual functions of many graduate medical education programs complicate the issue. These programs, while training residents in a specialty, also provide their services to hospitals for patient care. Although the sponsoring institution (for example, the medical school or hospital with the overall authority and responsibility for a resident’s graduate medical education) evaluates the resident’s training, it may not control his or her patient care services.
An analysis to determine direction and control should focus on which institution is liable in the event of a resident’s negligence and which benefits economically from his or her services, in addition to other factors.
Section 218 agreements. If the resident’s employer is a state or local government entity (such as a state university or hospital), the resident’s services may be covered by a “section 218 agreement.” Before 1991 Social Security coverage of state and local government employees was available only under an agreement (pursuant to section 218 of the Social Security Act) between the state and the SSA; if a resident’s services were not covered by one of these agreements, he or she might have been subject to FICA tax. Since 1991 state and local government employees generally have been covered by FICA.
The student FICA exception is available only for services performed for a school, college, university or related organization. While a university medical school would clearly meet this definition, a hospital generally would not. Even if a hospital and medical school report wages under the same employer identification number, they may not be considered a single employer. In addition, even if the entity is a related organization, the exception might not be available if the school, college or university is a state or local government employer.
To determine whether a resident is also a student, the IRS considers the residency program’s written educational requirements and whether the program changes from year to year as a residency progresses; it also looks at whether written program requirements are followed in practice. Other factors include academic requirements, time spent in the classroom, whether the program leads to a degree or certificate, and whether a resident can be terminated from the program for failure to meet academic standards.
For a discussion of this and other current developments, see the Tax Clinic, edited by Mark Weinberger, in the January 2001 issue of The Tax Adviser.
—Nicholas Fiore, editor
The Tax Adviser