Physicians Could Be Eligible to Receive IRS Refund
I heard the Internal Revenue Service is going to refund the employment taxes physicians paid when they were residents. Is this true? If so, how do I go about filing for this?
J. Byrne, MD
Dr. Hospitalist responds: On March 2, the IRS announced that it had “made an administrative determination to accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods ending before April 1, 2005, when new IRS regulations went into effect.”1 For folks like me, who have a hard time understanding the different numbers on my paycheck, here is an explanation. (I am neither an attorney nor an accountant; for any such counsel, I suggest you visit a professional.)
Federal Insurance Contributions Act, or FICA, taxes are the payroll taxes collected for Medicare and Social Security programs. These taxes fund insurance programs for the elderly, disabled, survivors (Social Security), and for healthcare (Medicare). This tax originated in 1935. Employees and employers are required to make regular contributions to FICA through payroll deductions. For 2010, the FICA tax rate is 7.65% (6.2% for Social Security and 1.45% for Medicare) on gross earnings (earnings before any deductions). The individual contribution limit for the Social Security program is 6.2% of wages up to $106,800 (a $6,621.60 cap per individual). Unlike Social Security, there is no cap on contributions to the Medicare program. Individuals and employers each contribute 1.45% of wages earned (for a total of 2.9%) to fund the Medicare program.
House staff traditionally participate in this government insurance program by contributing FICA taxes. But in the 1990s, employers and individuals began filing FICA refund claims to the IRS based on the student exception (Internal Revenue Code section 3121(b)(10)). It is my understanding that this section of the IRS code exempts students from the FICA tax.
So are house staff recognized as students under the eyes of the law? In the 1998 court case State of Minnesota vs. Apfel, the court opined that University of Minnesota house staff exist for the primary purpose of education, rather than for earning a livelihood. Based on that ruling, the IRS chief counsel issued a memorandum in July 2000 that stated house staff could meet the FICA student exemption if 1) the house staff’s employer is a school, and 2) the house staffer is considered a student by the employer.
So why has it taken so long for the IRS to decide to refund these dollars? Over the past decade, there have been other court cases with conflicting interpretations of the IRS code. In January 2005, the IRS implemented new regulations that did not require house staff to contribute FICA taxes. But this new regulation did nothing about past house-staff contributions. Last year, in another Minnesota case, Mayo Foundation for Medical Education and Research vs. the United States, the court again interpreted the IRS regulations as limiting the student FICA exception to students who are not full-time employees. Despite other ongoing lawsuits, the IRS has decided that individuals who were house staff prior to April 2005 and meet the criteria are excepted from FICA taxes.
So who is eligible to receive these FICA taxes refund? It is my understanding that if you are a house officer who contributed to FICA taxes prior to April 2005, you are eligible for a refund only if you or the institution where you trained filed a claim in a timely fashion. The period of limitation for filing a claim has expired. If you think that you are covered by a claim, the IRS states that you should expect to hear from the institution where you trained about the refund process. You will not be hearing from the IRS directly.