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Student Social Security and Medicare Withholding

The Internal Revenue Service released Internal Revenue Procedure 98-16 on January 20, 1998.  This revenue procedure addresses the student FICA issue.  IRC Section 3121(b)(10) provides an exception from the FICA tax for students enrolled and attending class.  Rev. Proc. 98-16 is intended to provide objective and administrative guidelines for determining employment tax liability as it relates to the exception of 3121(b)(10).

THE GUIDELINES ARE AS FOLLOWS:

1. All students who are half-time undergraduate or half-time graduate will qualify for the student exclusion from FICA, regardless of the number of hours worked, the amount of wages received, the type of service performed, or the place where the services are performed.  However, the employment must be incident to his pursuing a course of study at the institution.  The term ?half-time undergraduate student? has the same meaning as the term in the Department of Education regulations.
2. Students who are classified as ?career employees? are not generally eligible for the exclusion, since their employment is not incident to and for the purpose of pursuing a course of study.  The definition of a ?career employee? is an individual who is (1) eligible to participate in a section 401 or 403(b) retirement plan or would be eligible to participate if age and service requirements were met, (2) eligible for reduced tuition (other than qualified tuition reduction under section 117(d)(5) provided to a teaching or research assistant who is a graduate student), or (3) classified by the institution as a career employee.  It may be possible that unusual facts and circumstances would qualify the career employee for the exemption.
3. The determination of a student?s half-time status is made at the end of the drop-add period and can be adjusted thereafter at the institution?s discretion.
4. The student FICA exceptions will not apply to students who are not enrolled in classes during school breaks of more than 5 weeks (including summer breaks of more than 5 weeks).
5. The revenue procedure does not apply to postdoctoral students, postdoctoral fellows, medical residents, or medical interns because the IRS believes it cannot be assumed that the services performed by these persons are incidental to their studies.  Apparently, these services must continue to be considered on a facts and circumstance basis.
6. There is an ?anti-abuse rule? that permits the IRS to ignore these standards and make a determination based on all the facts and circumstances.  This rule will come into play if the IRS determines that there has been an attempt by the institution to mischaracterize or manipulate the relationship with the student employee.