FICA (Social Security and Medicare) taxes do not apply to services performed by students employed by a school, college, or university where the student is pursuing a course of study. Whether employees are students for this purpose requires examining the individual’s employment relationship with the University to determine if employment or education is predominant in the relationship. If the employee is enrolled and regularly attending classes at Washington University (the exemption is not applicable to employees who are taking classes at another institution) in pursuit of an educational credential as their primary purpose for being here, FICA taxes will not apply to compensation.
The university will make student FICA determinations based on Revenue Procedure 2005-11 safe harbor guidelines, this is, those students who meet these guidelines will be treated as exempt from FICA taxes, while those student employees who do not meet these guidelines will be subject to FICA taxes on their wages. Additionally, payments to clinical and other fellows, medical residents and postdoctoral research associates are not eligible for the student FICA exemption.
Background
FICA (Federal Insurance Contributions Act) taxes are imposed on all wages paid or received with respect to employment. Where an employer-employee relationship exists, employers are required to withhold FICA from the wages of an employee and pay a matching contribution, subject to certain limitations. Payments to employees for services are generally subject to FICA tax unless an exemption from the tax is provided in the Internal Revenue Code.
Section 3121(b) (10) of the Internal Revenue Code sets forth an exemption from FICA tax for employees of schools, colleges or universities who are enrolled and regularly attending classes at those institutions. However, all student employees do not qualify for the FICA tax exemption, the policy is that only those student employees who provide services that are “incident to and for the purpose of pursuing a course of study” and whose educational relationship with the school predominates over the person’s employee relationship will qualify. This test is reflected in revised IRS regulations, which set forth a broad “facts and circumstances” test that should be used by employers in making the determination whether a student employee qualifies for the student FICA exemption. A “facts and circumstances” test means you review all information pertaining to this employee in addition to the IRS regulations in order to determine if the student employee qualifies for the FICA exemption.
In addition to its regulations, the IRS has issued Revenue Procedure 2005-11, which sets forth certain “safe harbor” tests that, if met, will deem the student employee to be exempt from FICA tax. Meaning, if the student employee qualifies under these safe harbor rules, the person will be treated as exempt from FICA tax without the necessity of looking to the “facts and circumstances” test. The IRS recognizes that it may be possible for an individual to not meet the Revenue Procedure 2005-11 safe harbor tests and still qualify for the student FICA exemption by looking at the facts and circumstances surrounding the student’s employment. Revenue Procedure 2005-11 is applicable with respect to services performed on or after April 1, 2005, and supersedes the earlier safe harbor tests set forth in Revenue Procedure 98-16. As a general rule, the policy of the university will be to make student FICA determinations based on Revenue Procedure 2005-11 safe harbor guidelines; that is, those student employees who meet these guidelines will be treated as exempt from FICA tax, while those student employees who do not will be subject to FICA tax on their wages.
Criteria for Student FICA Tax Exemption per IRS Safe Harbor
- General Standards: Under safe harbor rules, a wage payment made by the university to an individual who (a) is at least a half-time undergraduate student or at least a half-time graduate or professional student, (b) is not a full time employee, (c) is not a professional employee, and (d) is not a career employee eligible to receive certain employment benefits or participate in certain employment benefit plans (e.g. vacation, sick leave, 403(b), reduced tuition) will qualify for the student FICA exemption.
- Graduating Students: A student who is less than half-time will still meet the safe harbor guidelines if the student is graduating. That is, an individual who is in the last semester or term of a course of study and is enrolled for the number of credit hours needed to complete the degree requirements will still be regarded as at least a half-time student, even if the student is enrolled in less than half the number of credit hours required of full-time students.
- School Breaks: An individual working for the university during the summer or during other school breaks of more than 5 weeks, but who does not have the status of a student during this period, as defined in this policy, is not eligible for the student FICA exemption on wages paid during the period. The student FICA tax exemption does apply to school breaks of 5 weeks or less (for example, winter and spring breaks) provided the individual is a continuing student. That is, in order to be eligible for the FICA tax exemption during school breaks of 5 weeks or less, the individual must qualify for the FICA tax exemption on the last day of the semester or term preceding the break and be eligible to enroll for classes in the first semester or term following the break.
- Other Employee Groups: The safe harbor guidelines are not available for those employees who are postdoctoral students, postdoctoral fellows, medical residents, or medical interns because the services performed by these employees cannot be assumed to be incidental to and for the purpose of pursuing a course of study. Thus, payments to clinical and other fellows, medical residents, and postdoctoral research associates are not eligible for the student FICA exemption.