The IRS has issued a detailed Procedure setting out the circumstances in which services in the employ of certain public or private nonprofit schools, colleges, or universities, or affiliated organizations performed by a student qualify for the exception from Federal Insurance Contributions Act (FICA) tax, (i.e. social security and Medicare taxes).

The conditions that apply to the exception are as follows.

• The employer must be an "institution of higher education", under the Department of Education's regulations.
  
  Other institutions may also qualify, such as where services are performed by a student for a secondary school.
  
  
• The employer must be a school, college or university (SCU) or an affiliated organization with respect to an SCU.
  
  An organization is an SCU if its primary function is the presentation of formal instruction, it normally maintains a regular faculty and curriculum, and it normally has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on.
  
  The primary function requirement may cause the student FICA exception to be unavailable to certain organizations, such as hospitals and museums, that have embedded within them divisions or functions that carry on educational activities.
  
  
• The employee is a student who is enrolled and regularly attends classes at the SCU.
  
  An employee is a student if the employee's services for the SCU are incident to and for the purpose of pursuing a course of study at the SCU. The educational aspect of the relationship, as compared to the service aspect, must be predominant in order for the employee's services to be incident to and for the purpose of pursuing a course of study.
  
  This definition of a student would exclude postdoctoral students, postdoctoral fellows, medical residents and medical interns from the exception. The services performed by such employees cannot be assumed to be incident to and for the purpose of pursuing a course of study.
  
  
• The employee is not a "full-time employee", as defined by the employer's standards and practices. A normal work schedule of 40 hours or more is always considered to be full-time. The employee's services are not incident to and for the purpose of pursuing a course of study. However, the employee's work schedule during academic breaks is not considered in determining whether the employee's normal work schedule is 40 hours or more per week.
  
  
• The employee is not a "professional employee", i.e. an employee whose work: (1) requires knowledge of an advanced type in a field of science or learning, (2) requires the consistent exercise of discretion and judgment, and (3) is predominantly intellectual and varied in character. The service aspect of the employee's relationship with the employer is predominant.
  
  
• The employee is not eligible to receive the following benefits:
  
  
  • vacation, sick leave, or paid holiday benefits
    
    
  • participation in any retirement plan that is established or maintained by the institution, or would be eligible to participate if age and service requirements were met
    
    
  • an allocation of employer contributions other than contributions under a 403(b) tax deferred retirement plan, or would be eligible to receive such allocations if age and service requirements were met, or if 402(g) contributions were made by the employee
    
    
  • an annual deferral by non-elective employer contributions under an eligible 457(b) deferred compensation plan, or would be eligible for such annual deferrals if plan requirements were met, or if contributions by salary reduction were made by the employee to a 457(b) plan
    
    
  • reduced tuition, other than qualified tuition reduction provided to a teaching or research assistant who is a graduate student, because of the individual's employment relationship with the institution, or
    
    
  • one or more of the employment benefits described under sections 79 (life insurance), 127 (qualified educational assistance), 129 (dependent care assistance programs), and 137 (adoption assistance) because of the individual's employment relationship with the institution.
    
    However, receipt of or eligibility for any of the above employment benefits that is mandated by state or local law will not cause an employee to be ineligible.
    
    If an individual, who is a "full-time employee", "professional employee" or receiving any of the benefits described above, performs services in multiple job positions, then the individual will with respect to any of those positions be deemed to have the same employee status with respect to all of the positions.

  
  
  

• The employee is a half-time undergraduate student or a half-time graduate or professional student who is not a "full-time employee", "professional employee" or receiving any of the benefits described above, but who is an undergraduate or graduate student who is in the last semester, trimester, or quarter of a course of study requiring at least two semesters, trimesters, or quarters to complete and is enrolled in the number of credit or unit hours needed to complete the requirements for obtaining a degree, certificate, or other recognized educational credential offered by that institution of higher education even if enrolled in less than half the number required of full-time students.

Although the Revenue Procedure applies with respect to services performed on or after April 1, 2005, employers may rely on it with respect to services performed prior to that date.

The Procedure stresses that, even though the strict application of these rules may exclude an employee from the student FICA exception, the employee may qualify based on consideration of all the facts and circumstances.

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...back to 23 December 2004

Further information:
www.irs.gov/pub/irs-drop/rp-05-11.pdf
www.ustreas.gov/press/releases/js2165.htm
www.ustreas.gov/press/releases/reports/studentficaexxeption.pdf