Medical residents need not pay Social Security taxes, court rules

Residents will receive refunds of between $2,700 and $3,500 per year they paid into the system.

As tax time approaches, around 1,400 University medical residents may be getting paid by the government, instead of paying it.

U.S. District Judge Richard Kyle ruled in favor of the University on Tuesday in its challenge of the Internal Revenue Service’s policy of denying medical residents the student exemption for paying social security.

The University was awarded more than $1 million in the ruling. The money will be distributed to medical residents who paid into the Social Security system in the second quarter of 2005, but may apply to all residents who have paid into the system since the IRS instituted the policy, from 2005 until present.

The average payment for each resident will be between $2,700 and $3,500 per year they paid into the system.

Federal Insurance Contributions Act, or Social Security, taxes are taken out of people’s paychecks. Since 1939, there has been an exemption for students working on campus, according to the IRS’s Web site.

Mark Rotenberg, the University’s general counsel, said the University’s struggle to define students’ tax exemption status with the federal government has a 15-year history.

For example, in 1998 the University won a case against the IRS that decided the medical residents were allowed under the student exception, he said.

In 2005, the IRS changed its regulations, stating that the previous case the University won and other cases like it weren’t valid, so the medical residents still had the taxes withheld, Rotenberg said.

This time around, the IRS argued that because medical residents work more than 40 hours per week, they aren’t considered students and shouldn’t receive the student exemption.

Kyle ruled that residents should receive the exemption because they are employees of the University and not hospitals. Also, the IRS’s regulations were ruled an invalid interpretation of Congress’ intent, Rotenberg said.

“The government’s position ignores the crucial fact that the University is a nonprofit educational institution, whose purpose is to provide medical education,” he said. “The University benefits when the residents complete their residency program.”

Residents are medical school graduates who are pursuing supplementary education, which typically lasts between three and five years, Carol Sundberg, operations director of graduate medical education at the University’s medical school, said.

A typical resident receives a stipend of between $44,000 and $57,000, according to University documents.

The University has been deducting FICA taxes from the students since 2005, Sundberg said.

“The favorable ruling may result in our ending the withholding of FICA from residents,” she said.

The Medical School’s payroll office has been tracking how much has been withheld from particular students since the IRS policies changed in 2005, Sundberg said.

Despite the issues and amount of money discussed in the case, Jenna Langer, spokeswoman for the University’s Academic Health Center, said a majority of the medical students weren’t aware of the case.

Charles Miller, spokesman for the Department of Justice and the defense on the case, said the department is “reviewing the ruling of the case” but has no further comment at this time.

The government will likely appeal the case because of the large amount of money at stake, Rotenberg said.

“This will save us over $4 million a year,” Rotenberg said. “The University will continue to press the issue.”