Medical residents conclusively determined to be subject to FICA tax beginning April 15, 2005 under new U.S. Supreme Court decision

Posted on February 11, 2011 by Elizabeth M. Mills

In Mayo Foundation for Medical Education and Research v. United States , the U.S. Supreme Court upheld the validity of a Treasury Regulation that states that the student exception from FICA (Social Security and Medicare) tax does not apply to medical residents because they work at least 40 hours per week. Applying the deferential two-part standard of review from Chevron  the Supreme Court concluded that the relevant statutory provision was ambiguous and the regulation was a permissible interpretation of the statute. 

For background on the medical resident FICA issue, click here.  

As we have previously reported, since the 1990’s many academic medical centers and individual medical residents have filed claims with the IRS seeking refunds of FICA taxes paid on medical resident salaries based on the argument that the residents are students and thus exempt from FICA. In March 2010, the IRS announced that it would concede and pay outstanding claims for periods before April 1, 2005. April 1, 2005 is the date the new FICA regulation precluding student status for full-time workers  went into effect. 

In June of last year the Supreme Court agreed to hear an appeal of a decision by the Eight CircuitCourt of Appeals in which the Eight Circuit held that the regulation was valid and denied the taxpayers’ refund claims. The Supreme Court affirmed that decision. The Supreme Court stated that the statute does not define the term “student” or otherwise directly address whether medical residents are subject to FICA tax, and concluded that the full-time employee rule is a “reasonable interpretation” of the statute. 

While the legal standard applied by the Supreme Court in determining the validity of tax regulations is of great interest to tax practitioners, the significance of this decision for most of us is that the debate about whether medical residents are exempt from FICA tax will finally be put to rest. All timely-filed claims covering periods before the regulation took effect are being paid by the IRS (see here for IRS information and frequently asked questions on this payment process). Medical residents will not be exempt from FICA tax for periods after the regulation took effect – regardless of whether refund claims were filed for post-4/1/2005 periods. Unless there is federal legislation, this multi-decade discussion seems to have come to an end.
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Medical Resident FICA -- Action on Individual Refund Claims

Posted on August 30, 2010 by Elizabeth M. Mills

We have been closely following the medical resident FICA refund issue.  As we noted in our blog entry in March on the topic, the IRS conceded that refund claims for FICA taxes for medical residents for the periods before April 1, 2005 will be paid.  The IRS has now announced this month that it has begun sending letters to individual medical residents who filed individual claims for FICA refunds.  These letters ask the individuals to submit copies of their claims. 

Medical residents who filed a claim but did not receive a letter by August 16, 2010 should contact the IRS.  

The IRS has prepared FAQs for these refund claims that are available here.

For additional information on the medical resident FICA refund issue, please review our June 2, 2010 blog entry. 

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United States Supreme Court will Hear Medical Resident FICA Case

Posted on June 2, 2010 by Elizabeth M. Mills

Many health care and medical education institutions have claims pending with the IRS for refunds of the FICA (Social Security and Medicare) tax paid on wages for employed medical residents.  The issue for these claims is whether the residents are “students,” and their wages accordingly exempt from FICA tax, for purposes of the student FICA exception in the Internal Revenue Code.

As we reported earlier in March of this year, the IRS announced that it would concede and pay outstanding claims for periods before April 1, 2005.  The significance of the April 1, 2005 date is that new regulations went into effect on that date providing that the student exception from FICA tax does not apply if the individual works full-time.

Last summer, the Eighth Circuit Court of Appeals held that this regulation was valid in the Mayo Foundation for Medical Research and Education and the University of Minnesota cases.  These institutions petitioned the Supreme Court for certiorari.

Yesterday, the United States Supreme Court granted the certiorari petition and will hear the appeal concerning the availability of the student FICA exception for medical residents after April 1, 2005.  As a practical matter, the grant of certiorari means that this issue is still up in the air for the time being and institutions should consider whether they should still continue to file protective refund claims for recent years.
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IRS to Honor Certain Medical Resident FICA Refund Claims

Posted on March 11, 2010 by Elizabeth M. Mills

Since the 1990's, many academic medical centers have filed claims with the IRS seeking refunds of FICA (social security and Medicare) taxes paid on medical resident salaries on the basis that the residents are students and exempt from FICA.  For the most part, the government has come out on the losing side when this issue has been litigated. 

The IRS has now announced that it plans to concede this issue for periods before April 1, 2005, when new IRS regulations went into effect.  The IRS's brief announcement does not indicate the terms on which claims will be paid.  Still, the IRS notes that verification of the claim amount will be required and interest will be paid. 

The IRS is not conceding this issue for periods on and after April 1, 2005.  On that date, new regulations went into effect providing that the student exception from FICA tax does not apply if the individual works full-time, which of course residents do.  The Eighth Circuit decided last year that the new regulation was valid and precluded FICA tax refunds for residents after its effective date.  This case is the only appellate case on the issue to date.  The employers in that case, Mayo Foundation for Medical Education and Research and the University of Minnesota, have filed a cert. petition with the US Supreme Court; the Court has yet to act on that petition.

 

The IRS will, within 90 days of its announcement, begin contacting hospitals, universities, and medical residents who filed FICA refund claims for these periods with more information and procedures.

Employers and individuals with pending claims do not need to take any action at this time.

Taxpayers with currently pending suits should contact the Department of Justice attorney assigned to the case.

Organizations that employ residents and wish to keep their FICA claims for 2006 alive need to file refund claims by April 15, 2010.

For additional information about medical resident refund claims, please visit the IRS's Questions and Answers section.
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Parsonage: Are Clerics Employees or Self-Employed?

Posted on December 4, 2009 by Jacob I. Friedman

Parsonage is a seemingly innocuous five line tax benefit in the Code.  This "innocent" provision of the Code, Section 107, appears to have befuddled many ministers and their professional advisors, however.

 

About 90 years ago, Congress promulgated an exclusion from income for the rental value of the housing provided to a “minister of the gospel,” which includes priests, rabbis, imams and any other duly ordained, commissioned or licensed member of the clergy.  Alternatively, the minister can exclude the rental allowance paid as part of compensation, to the extent actually used as rent or other costs of home ownership.  Since 2002, the allowance is capped at fair rental value, including furnishings and appurtenances (such as a garage), plus the cost of utilities.

 

While there are IRS publications that explain the tax nuances of parsonage (e.g., Publication 517 and The Tax Guide for Churches and Religious Organizations), the unusual tax treatment of ministers can still be very confusing.

Ministers are effectively dual status employees.  Simply put, a minister is an employee for all tax purposes except for withholding and social security tax purposes, where he or she is treated like a self-employed person.  

The following are some of the highlights of this unique status for the employer and the minister:

 

1. An employer need not withhold any taxes from a minister’s compensation.      

     

2. There is no withholding of FICA (Federal Insurance Contributions Act) taxes from a minister’s compensation.  This includes the parsonage portion and the non-parsonage portion.

 

3. A minister must pay SECA (Self-Employment Contributions Act) taxes on the entire compensation, including the parsonage payment.  For example, if the minister receives $50,000 of compensation and half of that amount ($25,000) is designated as parsonage, SECA taxes must be paid on the entire $50,000.

 

4. A minister must pay quarterly estimated taxes to cover income tax and SECA tax liability, unless he or she entered into a voluntary withholding agreement with the employers.

 

5. The IRS takes the position in Rev. Rul. 68-507 that if the employer pays the employer portion of FICA on behalf of a minister, that amount is treated as additional taxable income to the minister for both income and self-employment tax purposes.

 

6. The minister is given a Form W-2.  There is no need to set forth the parsonage amount on the W-2, but the IRS writes that you may include the parsonage allowance in Box 14.  Including this amount is probably a good idea.

 

For more information about parsonage and the treatment of unique tax benefits accorded ministers, please see the IRS Minister Audit Technique Guide.
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