On January 11, 2011, the
Supreme Court announced its holding
in Mayo Foundation for Medical Education
and Research et al. v. United States
and applied the Federal Insurance
Contributions Act (FICA) to medical
residents.

Medical centers offer medical residency
programs typically lasting three
to five years that provide additional
education through hands-on experience
in a specialty to become board
certified. Residents often spend
between fifty and eighty hours a week
assisting senior residents and faculty
members with patient care. Residents
are usually paid an annual stipend
which can exceed $40,000 and
includes health and malpractice insurance
as well as paid vacation. An
education program accompanies the
patient care aspect of the residency.

Social Security is funded under FICA through the taxation of wages
employees earn. While the definition
of “wages” and “employment” are
quite broad, Congress has exempted
certain categories of service and individuals
from FICA, including “service
performed in the employ . . . of a
school, college, or university . . . if
such service is performed by a student
who is enrolled and regularly attending
classes . . .”

In 2004, the Department of the
Treasury adopted an amended rule
that provided that the services of
a full-time employee scheduled to
work forty hours or more per week
are not “incident to and for the purpose
of pursuing a course of study,”
and therefore such person is not an
“exempt” student for FICA purposes.
Educational institutions operating
residency programs challenged the
amended rule.

The Supreme Court upheld the
Treasury’s amended rule, holding
that it “is a reasonable construction”
of what Congress said in the Social
Security Act regarding the student
exception to taxation. Accordingly,
medical resident stipends are subject
to taxation under FICA.