Medical Residents Not Exempt From Social Security Taxes

Mayo Foundation for Medical Education and Research v. United States, No. 09-837 (U.S. Jan. 11, 2011) is a Supreme Court of the United States decision that affects medical students and residents in New York.  The issue is the case was whether medical residents are “students” exempt from paying Social Security taxes. Mayo Foundation for Medical Education is a charitable, not-for-profit corporation located in Minnesota, with 3 health clinics.  According to its website, more than 400,000 patients a year go to its outpatient clinics and hospitals in three states – Minnesota (Rochester), Florida (Jacksonville), and Arizona (Scottsdale).

Mayo Foundation’s residency programs provided stipends to doctors who graduated from medical school and sought additional instruction in a particular specialty. Residents in the programs participated in formal educational activities, and worked with patients.

Most wage-earning New Yorkers pay taxes on their wages under the Federal Insurance Contributions Act (FICA), which Congress enacted to collect funds for Social Security. Social Security funds federal programs that provide benefits for retirees, widows, disabled, and children of deceased workers. Social Security benefits are based on age, income, and the number of years a person works.  Where an employer-employee relationship exists employers are required to withhold FICA from the earnings of an employee and pay a matching contribution, subject to certain maximums. Each year, people have to pay social security taxes up to around $106,000 when earnings are no longer taxable for social security.  New Yorkers have to pay social security taxes on income when they are self-employed also.  The self-employed individual calculates the Social Security taxes in the Form 1040 Schedule SE.

There are exemptions under which certain New Yorkers do not have to pay FICA taxes. One exemption is for students. Under 26 U.S.C. § 3121(b)(10), Social Security taxes are exempt for  “service performed in the employ of a school, college, or university” by a “student who is enrolled and regularly attending classes at such school, college, or university.”  The student’s relationship with the university must be primarily an educational one.

In a unanimous decision issued on January 11, 2011, the US Supreme Court held that the Mayo Foundation’s medical residents were employees not students. The medical residents were subject to FICA taxes. The court relied partially on an Internal Revenue Service regulation interpreting the student exemption.  According to the regulation, individuals regularly scheduled to work 40 hours per week or more cannot claim the student exemption.

Contact an experienced New York tax attorney for advice on payroll tax reporting.