Can medical residents and their employers get FICA refunds?

Alan Hill | August 20th, 2010

If you were a medical resident between the late 1990s and 2005, the IRS may owe you a FICA tax refund. The same is true for medical colleges and teaching hospitals that employed residents during this time.

FICA (Federal Income Contributions Act) taxes are comprised of Social Security and Medicare taxes that are paid on wages earned for services performed. They require withholding by both the employer and the employee.

In the late 1990s, a philosophy emerged among university medical colleges and teaching hospitals that suggested medical residents should qualify as students, and therefore should not be subject to FICA taxes. The debate about medical resident eligibility for FICA exemption raged and unsuccessful lawsuits were filed.

Finally, effective April 1, 2005, the IRS ruled that anyone working more than 40 hours per week as a student did, in fact, have FICA responsibility.

Before April 1, 2005, hospitals, universities and medical residents filed protective claims with the IRS to ensure they would be eligible for any tax refunds should the IRS rule that FICA did not apply to the residents. The IRS recently announced that it will honor the protective claims that employers or their employees filed before April 1, 2005.

The IRS will send a letter to all medical colleges, teaching hospitals and former medical residents who made claims to inform them that they will accept their claims.

Employers who filed protective claims on behalf of residents must obtain consent from the former residents in order to request funds on their behalf, if they haven’t already. Employers who filed protective claims on behalf of residents, and former residents who filed their own protective claims, don’t need to do anything to receive a refund if the tax information in the letter they receive is correct.

Employers and former residents who believe the amount of the tax refund is incorrect, or who filed claims that are not listed on the IRS letter, will need to provide additional documentation to the IRS, including a copy of the protective claim and proof of timely filing. Your accountant can help you amend the claim. However, if you did not file a protective claim before April 1, 2005, you can’t file one now.

If you receive a letter from the IRS regarding a protective claim, and if you need to make corrections to it, you must respond before the deadline stated in the letter. If the deadline passes without a response, the IRS will automatically process the claim using the original claim information.

For additional assistance in responding to the FICA protective claim letter, please contact your financial advisor.

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