The U.S. Supreme Court recently addressed medical residents are “students” exempt from FICA taxes under 26 USC § 3121(b)(10). In a unanimous decision, dated January 11, 2011, the Court ruled that medical residents are employees rather than students and, therefore, are subject to FICA taxes. See Mayo Found. for Med. Educ. & Research v. United States, U.S., No. 09-837, 1/11/11. The decision addressed residency programs offered by the Mayo Foundation for Medical Education and Research, which provide stipends to doctors who have graduated from medical school and seek additional instruction in a chosen specialty. Although residents are required to take part in formal educational activities, the majority of their time is spent caring for patients. The Court relied heavily on an Internal Revenue Service regulation interpreting the exemption, in which the IRS stated that individuals regularly scheduled to work 40 hours per week or more cannot claim the student exemption. Chief Justice Roberts wrote, “Mayo does not dispute that the Treasury Department reasonably sought a way to distinguish between workers who study and students who work. Focusing on the hours an individual works and the hours he spends in studies is a perfectly sensible way of accomplishing that goal.”
Health care employers promptly should review pay practices with respect to doctors in residency programs to ensure appropriate tax withholdings. Also, to the extent medical residents are classified as independent contractors, rather than employees, that classification should be carefully reviewed. In any event, employees engaged in internship or resident programs, whether or not licensed to practice prior to the commencement of the program, may be exempt professionals under the Fair Labor Standards Act if they enter such programs after the earning of the appropriate degree required for the general practice of their profession. See 29 CFR 541.304.