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Business and Policy Areas
Business and Policy Areas

IRS Proposes Rules on Student FICA Exception, Medical Residents Ineligible as "Professional Employees"

February 25, 2004

IRS published a notice of proposed rulemaking (NPRM) February 25, clarifying the Service's position on student FICA withholding. The proposed rules solidify provisions set forth in Rev. Proc. 98-16 outlining the Service’s criteria for student employee eligibility for the FICA withholding exception. The NPRM also creates a new category of individuals ineligible for the exception, defined as “professional employees".  An example in the NPRM clearly illustrates that medical residents fall into this new category. Written and electronic comments are due to IRS by May 25, 2004. 

According to the proposal, for purposes of the FICA exception, an institution will be considered a school, college, or university only if its primary function is to conduct educational activities. The primary function analysis may make the student FICA exception unavailable to hospitals and museums.

Students who are currently enrolled and regularly attending classes will be eligible for the exception provided their employment at the institution is incidental to their course of study, and they work less than 40 hours per week. 

An individual will be considered a "career employee" ineligible for the student FICA exception if any of the following apply

  • person regularly works 40 or more hours per week OR
  • person is a "professional employee" -- defined in the NPRM as an individual-
    •  whose primary duty is the the performance of work requiring advanced knowledge in a field of science customarily acquired by a prolonged course of specialized instruction and study (as distinguished from a general education, apprenticeship, or training); 
    • whose work requires the consistent exercise of discretion and judgment, and
    • whose work is primarily intellectual and varied in character (as opposed to routine mental, manual, mechanical, or physical work) OR
  • person participates in retirement and other benefit plans OR
  • person is required to be licensed to perform the services in question.

The NPRM includes an example illustrating how a medical resident is not eligible for the exception from FICA withholding due to his status as a professional employee.

The proposed rules are prospective and supercede Rev. Proc. 98-16. They may be relied upon until final rules are published.  It is anticipated that IRS will be addressing the settlement of existing FICA refund claims in the coming weeks. Written and electronic comments are due to IRS by May 25 and a public hearing has been scheduled for June 16.