• August 31, 2015

Medical Schools Must Pay Social Security Taxes for Residents, Supreme Court Rules

In a decision that will cost medical schools and teaching hospitals an estimated $700-million annually, the U.S. Supreme Court ruled unanimously on Tuesday that full-time medical residents in training are employees, not students, and are subject to Social Security and Medicare taxes.

The ruling, which representatives of medical colleges were quick to criticize, ends a longstanding dispute over whether medical colleges must pay the employer's portion of the taxes for their medical residents.

Before 2005, medical colleges did not have to pay the taxes, called FICA, for residents, even though they often work well beyond 40 hours a week--the medical colleges argued that the work was related more to their educational experience. In 2005, however, the IRS issued new rules that erased the exception for students who are essentially full-time employees, such as medical residents.

The case, Mayo Foundation v. United States (No. 09-837), involved the Mayo Clinic, in Rochester, Minn., and the University of Minnesota, which won a federal district-court ruling in 2008. In that opinion, the judge found that rules issued by the U.S. Treasury Department in 2005, excluding full-time medical residents from the student exception, were invalid because they were contrary to the law that created the Social Security system.

A three-judge panel of the U.S. Court of Appeals for the Eighth Circuit overturned that decision in 2009, saying the exception for students was meant only for those who worked part time while attending classes, but not medical residents, who are basically full-time employees of the teaching hospitals.

Four other federal appeals courts, in the Second, Sixth, Seventh and 11th Circuits, had ruled to the contrary, saying that the Internal Revenue Service must consider the situation at each institution rather than automatically applying the rule to exclude all medical residents from the student exception.

But on Tuesday, the Supreme Court said quite simply that the Treasury Department's rules about student employees are a valid interpretation of the federal tax laws and deserve legal deference.

"The [Treasury] Department reasonably sought to distinguish between workers who study and students who work," Chief Justice John G. Roberts Jr. wrote in the opinion. "Focusing on the hours spent working and those spent in studies is a sensible way to accomplish that goal. The Department thus has drawn a distinction between education and service, not between classroom instruction and hands-on training."

Sean P. Scally, university counsel and tax attorney for Vanderbilt University and Medical Center, said the court's reasoning was "remarkably thin" and seemed to find an administrative solution in order to make it easier for the IRS to collect taxes rather than a legal remedy that deals with the statutory issues. Instead of considering the facts and circumstances at every medical college, he said, the court has established a bright line that says any resident working more than 40 hours a week is required to pay the FICA taxes.

And because the decision will apply to all students who work more than 40 hours, Mr. Scally said, colleges will have to track the weekly earnings of student workers much more closely.

One positive result of the Supreme Court's decision, Mr. Scally said, is that medical colleges are still eligible for a refund of FICA taxes that they paid for residents before April 2005, when the IRS enacted the rule that students who were employed full-time were subject to those taxes.

Ivy Baer, a lawyer for the Association of American Medical Colleges, said she was disappointed by the ruling, but even a victory in the case would have had a limited impact, applying largely to teaching hospitals affiliated with universities.

Ms. Baer added that she doesn't think that the ruling will cause medical colleges to change requirements for residents to work extensive hours because those standards are usually set by accrediting agencies.

Theodore B. Olson, the former solicitor general who argued the case on behalf of the Mayo Clinic, issued a statement saying: "As the court itself acknowledged, medical residents are engaged in a formal and structured educational program that is an indispensable component of their medical training. The Treasury Department's regulation overlooks the important educational pursuits in which residents are engaged."


1. bcp1957 - January 11, 2011 at 03:55 pm

just what we need...another reason for health care costs to continue to increase!

2. mgrenci - January 11, 2011 at 04:22 pm

Actually it is just what we need: more money going into Social Security and Medicare (you know, to help cover some of the huge deficit in those programs). I find it hard to believe the total among all teaching hospitals will be only $700 million though.

3. 12094444 - January 11, 2011 at 05:10 pm

Medical Residents, Post Docs, what is the difference. Why should one pay and the other doesn't? The decision makes sense to me.

4. greenhills73 - January 11, 2011 at 05:11 pm

It seems that the hospitals should be the ones to pay these taxes, as residents are their employees but still students of their medical schools. While many medical schools own their teaching hospitals, a lot of medical schools do not own hospitals but have affiliations with community hospitals that support the residency programs.

5. amideasthq - January 12, 2011 at 08:30 am

Anyone knowledgeable as to how this will affect the many non-U.S.residents here on J-1 visas? Would they get taxes reimbursed?

6. jnbarnes - January 12, 2011 at 09:44 am

@Greenhills73. Residents are NOT students; they have graduated, they pay no tuition. They are employees of the agency that runs the residency (hospital, foundation, medical school). Residency is training for a specific role in medicine, it has an education component, it has a training component, it typically has a large service (read work) component. Residents are paid on the order of $50-80K annually. There is no reason they cannot pay their portion of FICA along with their employeer.

7. tgroleau - January 12, 2011 at 09:47 am

12094444 raises an interesting question about consistency.

Medical residents and post-docs should also be compared to apprentices in the skilled trades (electrician, plumber, etc.) and any education program with required hands-on experience.

I don't know it works everywhere but in this area electrical apprentices are in classes a couple of nights per week and hold paid position during the day with full taxation (including FICA). This goes on for a few years.

Compare/contrast with my student teaching semester. I was also in classes a couple nights and week and working full time during the day. The difference is that I wasn't paid at all for the day work (thus no taxes) and my "apprenticeship" lasted only a semester.

To be consistent, if students of any sort are paid for any required clinical-type of work, they should be taxed like any other employee. Yes, that would hurt some graduate students but even in my "starving graduate student" phase I was making about as much money as the high school dropouts working at McDonalds. Why should I get a tax advantage over them?

8. boblyman - January 12, 2011 at 10:56 am

Most residents are paid less than $50-$80K. Pre-fellowship residents are typically paid between $40-50K.

9. greenhills73 - January 12, 2011 at 11:04 am

I appreciate the answers here. I guess I considered the educational component to be primary in residency even though they have to work to learn, and thus considered residents to be like graduate students (yes, I knew they had already graduated and earned their degree.)

10. somadmin - January 12, 2011 at 12:41 pm

Response to greenhills73

Residents ARE employees of the hospital or health system in which the residency is conducted, but ARE NOT students in the medical school. No degrees or diplomas are granted at the end of residencies.

11. panacea - January 12, 2011 at 02:02 pm

It would be great if the collection of FICA encouraged hospitals to cut back on the brutal hours residents work.

These excessive hour contribute to medical mistakes and poor outcomes. There is no real justification for them other than the "I did it when I was a resident, so these up and comers can do it."

12. samusa - January 12, 2011 at 05:23 pm

The residents have already graduated from the Medical College, hence they should be treated as EMPLOYEES, not students, and the employer must pay its share of FICA tax. I wonder why IRS waited for so many years to realize this simple fact.

13. edmdlewis - January 12, 2011 at 06:09 pm

My it would be nice if residency training were primarily educational. Yes, we learn a lot from our patients. Yes, we have required didactic sessions. However, in a busy hospital the didactic sessions often take a backseat to "getting the work done". The less well funded the institution, the more reliance on the residents to do the massive amounts of paperwork required for appropriate medical care (and appropriate ass-covering). Just as an example, I am an intern at an academic institution and I work on average 70 hours a week. 5 of that is didactic lectures and/or simulation sessions. Less than 10%. The rest of it is patient care, plain and simple - which these days amounts to hours on a computer inputting orders and typing up patient histories & discharge summaries, and very little time in a patient's room. If I'm "just a student" I'd hate to see how hard an "employee" works.

14. edmdlewis - January 12, 2011 at 06:09 pm

And as a sidenote, $50k a year would be awesome. The real figure is as boblyman stated; much closer to $40.

15. 22063319 - January 13, 2011 at 10:26 am

This is old news in a way -- many years back Congress modified Title IV of the Higher Education Act to specify that medical schools could not classify residents as students for student loan deferment purposes. More recently, Congress rewrote the formula for Economic Hardship Deferment in a manner that now excludes most medical residents form this deferment category. Now most medical residents are responsible for accruing interest on loans that were subsidized during medical school, and they will have to pay their share of FICA, which will probalbly yield no additional benefit for them after they retire from medical practice.

"Trials of the rich", some may argue. But these changes work against efforts to create an environment that encourages medical residents and students to make specialty and career choices based on factors other than the financial bottom line.

16. gplm2000 - January 13, 2011 at 05:14 pm

Another exemption eliminated, there are a ton of them. Maybe someone other than the middleclass and affluent will start paying taxes in the US.

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