The New Student FICA Exception Regulations
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:
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:
IRS Rev. Proc. 2005-11 provides a safe harbor for students carrying a half-time workload defined by type of student:
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:
The new regulations
and Rev. Proc. 2005-11 provide helpful examples.
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 www.windstar.com. For additional information, call 1-800-259-6398 or email: firstname.lastname@example.org
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