The IRS has provided safe harbor guidelines for determining whether or not services performed by employees of certain institutions of higher education are eligible for the student exception from the Federal Insurance Contribution Act (FICA). (TDNR JS-2165; Rev. Proc. 2005-11)

The student exception to FICA applies with respect to services performed by a half-time undergraduate, graduate or professional student for an institution of higher education. An institution of higher education is defined as a public or private nonprofit school, college or university (SCU), or affiliated private foundations under Code Sec. 509(a)(3).

The "safe harbor" generally does not apply to full-time employees or employees that qualify for pension or employee benefit programs. Notwithstanding, an employee will not be ineligible under this safe harbor if receipt of employment benefits is mandated by state or local law.

The safe harbor also does not apply to post-doctoral students and fellows, medical residents, or medical interns. Services performed by these employees cannot be assumed to be incident to and for the course of study.

These standards, however, do not constitute the exclusive method for determining whether or not the student exception to FICA applies. Where the safe harbor does not apply, qualification for the student exception to FICA for services performed for a SCU is determined based on all the facts and circumstances.

The Supreme Court handed down a unanimous decision in January 2011, ruling that Reg. § 31.3121(b)(10)-2(d(e)(iii) was valid, thus permitting the IRS to classify medical residents who worked over 40 hours per week as employees who are ineligible for the student FICA exemption and subject to FICA taxes (Mayo Foundation for Medical Education and Research, SCt, Jan. 12, 2011).