IRS rule changes could cost students

A proposed rule change by the U.S. Internal Revenue Service could affect student employees across campuses nationwide by making them subject to FICA -- Social Security and Medicare employment taxes.

The proposed rule change would clarify the definition of whether an organization is a school, college or university based on the primary function of the institution. In addition, the proposed regulations will clarify whether students who hold jobs with their schools are primarily students or employees based on which occupation is more predominant.

The proposed regulations have created concern in universities with regard to research and teaching assistants, as well as medical residents. The proposal distinguishes between those student employees who can apply for student FICA exceptions and career employees who cannot.

Under the proposed change, a career employee is defined as someone who regularly works 40 or more hours a week, is eligible to receive certain retirement and other employee benefits, and is a professional employee whose primary duty consists of services requiring advanced knowledge in a field of science or learning.

University officials believe the primary purpose of the proposed rule change deals with medical residents and hospitals claiming refunds for FICA taxes paid.

"The main purpose of these proposed regulations are to counter recent IRS losses in cases brought by hospitals claiming refunds for FICA tax paid by medical residents," said Liz Salasko, an attorney in the General Counsel's Office at Penn.

Recently there have been conflicts between hospitals and the IRS over whether medical residents are primarily students or employees. Hospitals -- including the Penn Medical, Dental and Veterinary schools -- have been filing claims for refunds for FICA taxes paid for residents, but the IRS has refused to return any money.

However, the federal organization has recently lost several court cases regarding the refunds. Several courts have ruled in favor of the hospitals' position that medical residents are primarily students. It is this current situation that Salasko said the new proposed regulations are trying to combat.

"The real purpose of the regulations are to make clear the IRS position that medical residents are primarily involved in patient care and are employees," Salasko said.

A statement issued by the IRS Office of Public Affairs confirms that the "rules have particular relevance in determining whether a medical resident providing services for a hospital is considered a student for employment tax purposes."

Hospitals, however, maintain that the residents are involved in the learning process throughout their time in the hospital.

With the focus of the new rule changes concentrated on medical residents, Penn officials do not think that the proposed regulations will affect teaching or research assistants.

"It is not likely to have any effect on undergraduates," Salasko said. "Teaching and research assistants are not the focus of IRS scrutiny, and so the proposed regulations shouldn't impact them."

The proposed rule changes include an example specifically referring to a TA who is attending graduate classes and works fewer than 40 hours a week grading quizzes and teaching class or lab. That person, the rule says, is primarily a student and therefore not subject to FICA taxation under the new regulation.

The IRS is accepting comments on the proposed regulation through May 25 with a hearing scheduled for June 16.

Please note All comments are eligible for publication in The Daily Pennsylvanian.