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The New Student FICA Exception Regulations

by Paula Singer, Esq.

Section 3121(b)(10) of the Internal Revenue Code provides an exemption from social security and Medicare (FICA) taxes for compensation for services performed in the employ of a school, college, or university (and certain Section 509(a)(3) affiliates carrying out the educational purposes) if the services are performed by a student who is enrolled and regularly attending classes at the school, college, or university.

Students at public institutions may be exempt under the Student FICA Exception if the institution’s Section 218 agreement with the Social Security Administration specifically exempts wages paid by the institution to students. If the Section 218 agreement does not distinguish between students working for the educational institution and those working for a Section 509(c)(3) affiliate, work for either may qualify for the exemption.

New IRS regulations interpreting the elements of the Student FICA Exception became effective on April 1, 2005.

School, College, or University

Under the new regulations, the employer qualifies as a “school, college, or university” if:

  1. Its primary function is the presentation of formal instruction;
  2. It maintains a regular faculty and curriculum; and
  3. It has a regularly enrolled student body attending classes where the entity regularly conducts it educational activities.

This “primary function test” was added to prevent hospitals, museums, and other nonschool entities from benefiting from the Student FICA Exception.


To be a “student” an employee must be:

  1. Enrolled in credit courses leading to an education credential and regularly attending classes at the employing school, college, or university or affiliated organization; and
  2. Pursuing a course of study required for an education credential or necessary for an examination or certification required in the field or study.

IRS Rev. Proc. 2005-11 provides a safe harbor for students carrying a half-time workload defined by type of student:

  • Undergraduate. Half the academic credit of a full-time undergraduate student as long as the workload is at least 6 semester hours or 6 quarter hours per academic term for an institution using a standard semester, trimester, or quarter system.
  • Graduate. Half the academic workload as determined by the institution applying its own standards and practices.

The half-time workload determination is made at the end of the add/drop period. Students in the last semester, trimester, or quarter meet the requirement if they carry at least two academic periods to complete the course of study.

Education vs. Service Relationship

Also, in order to qualify for the Student FICA Exception, the work must be “incident to and for the purpose of pursuing a course of study.” Therefore, the educational relationship, rather than the service relationship, of the employee to the institution must be predominant. An employee who is a “full-time employee” of the institution cannot qualify as a student. An employee whose normal work week is 40 hours or more per week is always a full-time employee. Some exceptions are provided such as for work of 40 hours or more during academic breaks.

The regulations consider the following factors in determining whether the service relationship predominates over the education relationship:

  1. Work Hours. The closer the work hours approximate 40 hours per week, the more likely the relationship is service, even if some of the services include an educational or training aspect.
  2. Professional Employee. Work that requires a professional employee is more likely to be a service relationship. The regulations define a professional employee as one whose work a) requires advanced knowledge, b) requires consistent exercise of discretion and judgment, c) is predominantly intellectual and varied, and d) produces output that cannot be standardized relative to a given period of time. In addition, work requiring a license generally indicates a professional employee although this conclusion may be factually rebutted.
  3. Employment Benefits. Employment benefits (other than health coverage), indicate a service relationship. More weight is given to benefits traditionally offered to nonstudent employees such as vacation, sick leave, paid holidays, life insurance, dependent care, adoption assistance, reduced tuition (not including certain reductions for teaching and research assistants who are graduate students), and participation in a retirement plan. Participation in a retirement plan is given more weight than other benefits. Less weight is given to benefits mandated by state or local law.

The new regulations and Rev. Proc. 2005-11 provide helpful examples.

About The Author

Paula Singer, Esq. CEO of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA has over 25 years of experience providing advice and compliance services to employers on cross-border employment matters. For more information, visit For additional information, call 1-800-259-6398 or email:

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.

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