Other Information About Residency

IRS AND FEDERAL COURT CLOSE THE DOOR ON FICA “STUDENT EXEMPTION” FOR RESIDENTS 
September, 2009 Many teaching hospitals, beginning in the late 1990’s, sought to establish that salary earned by residents was exempt from FICA taxation under the so called “student exemption” contained in the Internal Revenue Code. If successful, teaching hospitals would have stood to save millions of dollars, and residents could potentially have seen an increase in their take home pay, but certainly would have lost some important social security benefits.

In 2004, the IRS responded to the teaching hospitals’ efforts by creating new regulations that make it nearly impossible for residents to qualify for the student exemption.  For example, one regulation states that employees who are scheduled to work 40 hours or more in a week do not qualify for the FICA student exemption.  This excludes almost every resident in the country.

There had been some uncertainty as to whether the new IRS regulations could withstand a challenge to their validity in federal court.  This doubt was allayed in June 2009 by the Eighth Circuit, which held the regulations to be valid.  The fact that the decision came out of the Eighth Circuit is significant because it is considered the most taxpayer friendly of all the federal circuits.

In conclusion, for all practical purposes, the new IRS regulations have established that salaries earned by residents are not exempt from FICA taxation.