Court ruling on taxing medical residents: are they students or employees?
Stephen Hunt June 24th, 2009
Essentially, for several years now, courts have been debating the issue of whether the IRS can tax medical residents at “teaching hospitals” who earn wages, but are also enrolled in classes. In 2004, the IRS lost a handful of cases because the courts determined that the law that gave the IRS the power to tax included an exemption for students, and that residents working at “teaching hospitals” were students – rather than employees.
So, what does the government do when a judge tells them something they do not like? They change the rules. After losing those cases, the IRS reacted by issuing an interpretation of their own rules to state that they consider residents that work more than 40 hours a week to be employees rather than students – and therefore, should be taxed.
Earlier this month, an appeals court ruled that it was ok for the IRS to interpret and define residents as employees rather than students. So as it stands now, the tax refund is off the table unless a resident works less than 40 hours during a normal week. I am sure the hospital that was defeated by the appeals court ruling will appeal to the Supreme Court, but who knows if they will hear the case or not. Until then, both the teaching hospitals and their residents should be paying their FICA taxes.
Here is the WSJ article link: http://online.wsj.com/article/SB124484480481711085.html
And here is the link to the Court of Appeals opinion:
http://www.ca8.uscourts.gov/opndir/09/06/073242P.pdf