Executive Overview
On February 25, 2004, the Internal Revenue Service (the "Service") published in the Federal Register proposed regulations that, if adopted in their proposed form, will, on a prospective basis, resolve the ongoing questions of whether medical residents are subject to the provisions of the Federal Insurance Contributions Act ("FICA") and Federal Unemployment Tax Act ("FUTA"). If adopted, these regulations will apply FICA and FUTA to residents for services performed after February 25, 2004.
Under current regulations, service performed in the employ of a school, college or university are exempted from FICA and FUTA if such service is performed by a student who is enrolled and regularly attending classes at such school, college or university. The proposed regulations include definitions of "students" and "school, college or university" that will subject the stipends and other earnings of medical residents to FICA and FUTA. Concurrently with the issuance of the proposed regulations, the Service suspended its previous revenue procedure that provided a safe harbor for institutions of higher education in applying the student FICA exception and proposed a new revenue procedure aligned with the proposed regulations.
Discussion
After being unsuccessful in its recent attempts to convince courts to accept its long held position that medical residents are, in fact, employees and not students,1 the Service has turned to the regulatory process to achieve its goals. In proposed regulations promulgated on February 25, 2004, the Service has attempted to remove any question that, at least after that date, medical residents are 2003). not exempt from FICA or FUTA. The proposed regulations...
