Q&A: Understanding when you are owed FICA refunds

June 4, 2010

For more than a decade, most teaching hospitals in the United States and some individual taxpayers, including medical residents, have had refund claims pending with the IRS.

Q: A colleague told me that at one time medical residents were not required to pay FICA taxes due to an exemption in the Internal Revenue Code. As a result, he is expecting a refund for the FICA taxes he paid during his training. Is he correct?

A: Educational institutions, including teaching hospitals, often employ students on a part-time or intermittent basis. For more than a decade, most teaching hospitals in the United States and some individual taxpayers, including medical residents, have had refund claims pending with the IRS. They say they qualify for the student exemption from the FICA (payroll) tax allowed under IRS rules and thus should have their FICA taxes refunded. FICA taxes are withheld from an employee's pay at a rate of 7.65 percent on gross earnings, with employers matching that amount for each employee. So on a resident's $50,000 annual stipend, the resident and the teaching hospital each would pay $3,825 in FICA tax, for a total of $7,650. Assuming a four-year residency at the same stipend, the potential refund would total $30,600 ($15,300 each for the resident and the hospital).

In the mid-1990s, the University of Minnesota and the Mayo Clinic successfully sued the IRS to recover FICA taxes, claiming that residents working in a hospital qualify for the student exemption. In response, in April 2005 the IRS instituted new regulations stating that employees, including medical residents, who work 40 hours or more for an educational institution are not eligible for the student exemption. But in March 2010, the IRS announced it would allow the student exemption for FICA taxes collected before April 2005.

For more information, call (800) 919-1703 or visit http://www.irs.gov/charities and click on Medical Resident FICA Refund Claims. Taxpayers with currently pending suits should contact the U.S. Department of Justice attorney assigned to the case.

Send your money management questions to medec@advanstar.com (please include your regular postal address). Answer provided by Lawrence B. Keller, CLU, ChFC, CFP, founder of Physician Financial Services, New York, New York.