On March 2, 2010, after years of protracted litigation in various courts across the United States, the IRS has made the determination that medical residents, interns and fellows are exempt from FICA taxes for tax periods before April 1, 2005.
"FICA" stands for the Federal Insurance Contributions Act that created Social Security, a contribution-based social insurance for the elderly, survivors and the disabled. The FICA payroll tax is currently set at 7.65% of the employee’s gross pay and a matching amount is paid by the employer.
Hospitals, medical schools and medical residents, interns and fellows began filing FICA refund claims in the 1990’s based on the supposition that they are eligible for a tax exception under IRS Code section 3121(b)(10). This is referred to as the “student exception” and exempts several groups, including services performed by medical residents, interns and fellows from the FICA tax.
This summer the IRS began contacting hospitals, universities and medical residents who filed FICA refund claims to provide additional information about the refund process. Institutions, except those with pending law suits involving medical resident FICA tax, that employed medical residents should have by now received Letter 4608, Medical Resident FICA Refund Claims, Employer Notification, which was mailed at the end of May 2010.
Who is Eligible for FICA Tax Refund?
Employers (hospitals and medical schools) and individual medical residents, interns and fellows are eligible to receive refunds if a timely refund claim was filed by them or the institution that employed them. The refunds are limited to individuals who were residents, interns or fellows from January 1, 1995 through March 31, 2005. The deadline to file a FICA tax refund claim has expired but even if you did not file FICA tax refund claim on your own behalf you may still be eligible for a FICA tax refund if your employer filed a timely claim.
What Should I do to Claim My Refund?
Hospitals, universities and other institutions that filed for FICA tax refunds during the affected tax periods are likely in the process of contacting you to provide additional information regarding any possible refund that you may be entitled to receive. Typically, you will be requested to consent to the institution receiving your share of the refunded FICA taxes and the institution will then send it to you. It is anticipated that the refund process will take several months. However, you should not delay in contacting the institution that employed you during your medical residency, intern, or fellowship to confirm that they filed a FICA tax refund claim and to confirm that they have your current contact information.
FICA Tax After, April 1, 2005 IRS Rule Change
The IRS has not conceded that the FICA tax student exception applies for tax periods ending after April 1, 2005 when the IRS changed its regulations. The revised IRS regulations related to FICA tax exceptions has been challenged in court by hospitals. On June 1, 2010, the U.S. Supreme Court agreed to resolve the issue concerning the availability of the student FICA tax exception for medical residents, interns and fellows after April 1, 2005.
Other Taxing Matters
FICA tax refunds are not counted as taxable income, however, the IRS intends to pay interest on the FICA tax refunds and the interest paid is subject to tax in the year it is paid. You should contact your tax professional for more information on this subject and to discuss your specific tax situation.
Additionally, your eligibility for and calculation of social security benefits (either current or future) may be affected in the event of a refund, depending on your personal circumstances. If you consent to the refund claim, you will be issued a Form W-2c which will reflect a reduction in your earnings for social security benefits purposes. Whether social security benefits that you are receiving currently or in the future are impacted by a reduction of wage credits as a result of the refund will depend on your particular facts and circumstances. You should contact your local Social Security Administration office with any questions regarding your particular situation.
If you have any additional questions please contact Eric Jones at the Law Office of Eric A. Jones, LLC at (614) 545-9998 or email firstname.lastname@example.org