Washington (Feb. 26, 2004) -- The Treasury and the Internal Revenue Service have issued proposed regulations on an exception from FICA employment tax for students employed by the school, college or university where the student is pursuing a course of study.


The proposed regs expand upon existing regulations and guidance and clarify that whether an organization is a school, college or university is determined based on the primary function of the organization. The determination of whether employees are students for purposes of the exclusion is made by examining the individual’s employment relationship with the employer to determine if employment or education is predominant in the relationship, according to the proposal.


The regulations make conforming changes for purposes of federal unemployment taxes, for which there is an identical exception. These rules help to determine whether a medical resident providing services to a hospital is considered a student for employment tax purposes.


In addition, the IRS released Notice 2004-12, suspending Revenue Procedure 98-16, which provided that students enrolled at least half-time at certain institutions of higher education qualify for the student FICA exception. The notice proposes a new revenue procedure that is consistent with the proposed regulations and provides interim reliance. Colleges and universities that have been relying on the safe harbor provided in Rev. Proc. 98-16 will generally be unaffected by this guidance.


-- WebCPA staff

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