Medical Residents Working Full Time Are Subject To Payroll Taxes

On January 11, 2011, the Supreme Court held in the Mayo case, that medical residents working full time were subject to payroll taxes. Previously, in 2009, the Eighth Circuit Court of Appeals reversed the earlier District Court decision concerning the payroll tax treatment of medical residents working for the Mayo Foundation for their residency program.  The District Court held that physicians pursuing additional education in their chosen specialty at the Mayo Foundation, for payroll tax purposes were treated as students and thus exempt from the taxes.

The IRS challenged the District Courts interpretation of students as exempt at The Eighth Circuit Court of Appeals.  The Eighth Circuit applied the Chevron rule which states that if the intent of Congress, with respect to a specific law is clear, then the IRS must adhere to the intent of Congress.  If the statute is unclear, the IRS may reasonable interpret the intent of Congress and apply the statute accordingly.  In 2004, the IRS amended its regulations in this area stating that “an employee is a student only if the services provided are incidental to the course of study.”  The IRS asserted that in the Mayo case, the residents’ work was not incidental to their course of study; rather it was their primary function.  The Eighth Circuit agreed with the IRS, indicating that students who work less than full time are not employees and in the Mayo case, medical residents worked full time, (50 to 80 hours per week) and were provided a stipend of over $40,000 per year plus health insurance, malpractice insurance and paid vacation time.

The Mayo Foundation appealed the Eighth Circuit decision to the Supreme Court.  However, the Supreme Court agreed with the Eighth Circuit’s interpretation of the Chevron rule.  The Court stated that the IRS, “reasonably sought to distinguish between workers who study and students who work”.

About the author

Gabriel J. Markiz, CPA/PFS, CFP®

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