IRS and Medical Residents Legal Brawl Goes Before Supreme Court

Are medical resident students or employees. In a brawl that arguably started in 1939, the issue is finally going before the Supreme Court based on the refusal of the IRS to treat them as students.

The law is simple and has been since 1939. Students are not subject to social security tax. You and I know this as the FICA tax taken out of our paychecks each pay period. The IRS has determined that upwards of $700 million in FICA taxes are not paid each year by medical residents. While the residents and hospitals argue they are students, the IRS argues they are employees.

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How do you become a doctor? Well, you go to college and then to medical school. You are not a licensed doctor when you graduate from medical school. Not a chance! Instead, you must get practical training. This is called a residency. You work in a hospital or medical office in your niche. The hours are very long and the pay isn’t great. Most will work upwards of 80 hours a week and make $60,000 a year or so.

The IRS argues that the above scenario constitutes a classic employee situation. As such, the agency believes the residents should be paying FICA tax. The residents obviously feel differently. The dispute ended up in the tax court a decade ago. The IRS lost every case! So, did it just give up? Not a chance. The Agency issued its own regulation stating that the residents had to pay FICA. The lawsuits started flying.

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The Supreme Court has decided to deal with the issue once and for all. The court will not determine whether a resident is a student or employee per se. Instead, it will decide whether the IRS had the right to simply issue its own regulation on the subject. At least that is what the Court has indicated. In truth, it is hard to imagine the Court not deciding the student-employee issue in an effort to put the dispute to bed once and for wall.

What will the result be? The liberals on the Court will vote against the IRS. The conservatives will vote for the IRS having authority. Once again, the final result will probably come down to what Justice Kennedy decides.

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