NIH Training: 26 CFR 401 - Employment Taxes
Part III
Administrative, Procedural, and Miscellaneous
26 CFR 401: Employment taxes.
(Also Part I, Sections 3121; 31.3121(b)(10)-2.)
Rev. Proc. 98-16
SECTION 1. PURPOSE
This revenue procedure sets forth generally applicable
standards for determining whether service in the employ of
certain public or private nonprofit schools, colleges,
universities, or affiliated organizations described in
Section 509(a)(3) of the Internal Revenue Code (the Code) performed by
a student qualifies for the exception from Federal Insurance
Contributions Act (FICA) tax provided under Section 3121(b)(10) of the
Code (Student FICA exception). These standards are intended to
provide objective and administrable guidelines for determining
employment tax liability. The Student FICA exception standards
were developed in response to requests for guidance by many
public and private nonprofit institutions of higher education.
SECTION 2. SCOPE
.01 Institutions of higher education typically distinguish
between career employees and student employees. Sections 5 and 6
of this revenue procedure contain generally applicable standards
for determining whether or not services performed by career
employees and student employees are eligible for the Student FICA
exception.
.02 The standards contained in this revenue procedure do not
apply to employees who are postdoctoral students, postdoctoral
fellows, medical residents, or medical interns because the
services performed by these employees cannot be assumed to be
incidental to and for the purpose of pursuing a course of study.
.03 The standards contained in this revenue procedure do not
constitute the exclusive method for determining whether the
Student FICA exception applies. Thus, for example, if the
standard for qualifying for the exclusion described in section 6
of this revenue procedure is not met, whether or not service in
the employ of a school, college, university, or affiliated
organization described in Section 509(a)(3) of the Code will qualify
for the Student FICA exception will depend on consideration of
all the facts and circumstances.
SECTION 3. BACKGROUND
.01 Sections 3101 and 3111 of the Code impose social security
and Medicare taxes (FICA taxes) on employees and employers,
respectively, equal to a percentage of the wages received by an
individual with respect to employment.
.02 Section 3121(a) of the Code defines "wages" for purposes
of FICA taxes as all remuneration for employment, with certain
exceptions. Section 3121(b) of the Code defines "employment"
as
services performed by an employee for an employer, with certain
exceptions.
.03 Section 3121(b)(10) of the Code excepts from the
definition of employment services performed in the employ of a
school, college, or university (whether or not that organization
is exempt from income tax), or an affiliated organization
described in Section 509(a)(3) of the Code, if the service is performed
by a student who is enrolled and regularly attending classes at
that school, college or university. Remuneration for services
excluded from the definition of employment under Section 3121(b)(10) of
the Code is not subject to FICA taxes.
.04 Section 31.3121(b)(10)-2 of the Employment Tax Regulations
provides that whether an employee has the status of a student is
determined on the basis of the employee’s relationship with the
school, college, or university for which the services are being
performed. An employee who performs services in the employ of a
school, college, or university as an incident to and for the
purpose of pursuing a course of study at the school, college, or
university has the status of a student in the performance of
those services. Employment that is not incident to and for the
purpose of pursuing a course of study does not qualify for the
exception. If the employee does perform services as an incident
to and for the purpose of pursuing a course of study and,
therefore, has the status of a student, the amount of
remuneration for services performed by the employee, the type of
services performed by the employee, and the place where the
services are performed are immaterial for purposes of the Student
FICA exception.
.05 Section 218 of the Social Security Act (the Act),
42 U.S.C. section 418, allows states to provide Social Security
coverage for services performed by students for the public school
the student is attending under agreements established with the
Social Security Administration. If a state has exercised its
option under Section 218 of the Act to provide for coverage of student
services, Section 3121(b)(10) of the Code provides that those services
will not qualify for the Student FICA exception.
SECTION 4. INSTITUTIONS OF HIGHER EDUCATION
.01 The standards contained in this revenue procedure apply to
institutions of higher education. For purposes of this revenue
procedure, the term "institution of higher education" includes
any public or private nonprofit school, college, university, or
affiliated organization described in Section 509(a)(3) of the Code that
meets the requirements set forth in Department of Education
regulations at 34 C.F.R. Section 600.4 (1997), as amended from time to
time, and that is accredited or preaccredited by a nationally
recognized accrediting agency as defined in the Department of
Education regulations at 34 C.F.R. Section 600.2 (1997).
.02 Services for other institutions may also be eligible for
the Student FICA exception. Thus, for example, services
performed by a student for a secondary school may be eligible for
the Student FICA exception. Whether or not services for other
institutions, such as secondary schools, qualify for the Student
FICA exception is determined based on the facts and circumstances
of each case.
SECTION 5. STANDARDS APPLICABLE TO CAREER EMPLOYEES
.01 Services performed by career employees are not eligible
for the Student FICA exception under the standard in section 6 of
this revenue procedure because their employment cannot generally
be considered to be incident to and for the purpose of pursuing a
course of study. However, a career employee may be eligible for
the Student FICA exception, based on consideration of all the
facts and circumstances.
.02 For purposes of this revenue procedure, the term "career
employee" is defined as any individual performing services for an
institution of higher education who--
(1) is eligible to participate in any retirement plan
described in Section 401(a) of the Code that is established or
maintained by the institution, or would be eligible to
participate if age and service requirements were met;
(2) is eligible to receive an allocation of employer
contributions other than contributions described in Section 402(g) of
the Code under an arrangement described in Section 403(b) of the Code,
or would be eligible to receive such allocations if age and
service requirements were met, or if contributions described in
Section 402(g) of the Code were made by the employee;
(3) is eligible for reduced tuition (other than qualified
tuition reduction under Section 117(d)(5) of the Code provided to a
teaching or research assistant who is a graduate student as
described in section 7.03 of this revenue procedure) because of
the individual’s employment relationship with the institution; or
(4) is classified by the institution of higher education as
a career employee.
.03 If an individual performs services in multiple job
positions, the individual will be deemed a career employee with
respect to all of the positions if the individual is a career
employee in any one or more of the job positions.
SECTION 6. STANDARDS APPLICABLE TO UNDERGRADUATE AND GRADUATE
STUDENTS
.01 An individual who is a half-time undergraduate student or
a half-time graduate or professional student and who is not a
career employee will qualify for the Student FICA exception under
this revenue procedure with respect to services performed at or
for institutions of higher education in which they are enrolled
or at affiliated organizations described in Section 509(a)(3) of the
Code. Services performed by a student for any other employer do
not qualify for this exception.
.02 An individual is deemed to be a half-time undergraduate or
half-time graduate or professional student if the individual is
not a career employee and 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.
.03 The determination of student status should be made at the
end of the drop-add period and may be adjusted thereafter at the
institution of higher education’s option. The determination of
student status for payroll periods ending before the end of the
drop-add period may be based on the number of semester,
trimester, or quarter hours being taken at the end of the
registration period for that semester, trimester, or quarter.
.04 If an individual is described in section 6.01 or 6.02 of
this revenue procedure, services performed by the individual are
eligible for the Student FICA exception with respect to all
services performed during all payroll periods of a month or less
that fall wholly or partially within the academic term.
.05 The Student FICA exception does not apply to services
performed by an individual who is not enrolled in classes during
school breaks of more than five weeks (including summer breaks of
more than five weeks), other than services described in
section 6.04. See Rev. Rul. 72-142, 1972-1 C.B. 317, and Rev.
Rul. 74-109, 1974-1 C.B. 288. However, the Student FICA
exception applies to employment which continues during normal
school breaks of 5 weeks or less during which the individual is
not eligible for the Student FICA exception pursuant to
section 6.01 of this revenue procedure provided that the
individual qualifies for the Student FICA exception pursuant to
section 6.01 of this revenue procedure on the last day of classes
or examinations preceding the break and is eligible to enroll in
classes for the first academic period following the break.
.06 If the standards of this revenue procedure are met (and
section 8 does not apply), the amount of remuneration for
services performed by the employee, the type of services
performed by the employee, the place where the services are
performed, and the number of hours worked by the employee are
immaterial. If the services performed by a student otherwise
described in section 6.01 or 6.02 are covered under an agreement
pursuant to Section 218 of the Act, the Student FICA exception does not
apply.
.07 For provisions relating to domestic service performed by a
student in a local college club, or local chapter of a college
fraternity or sorority, see Section 31.3121(b)2-1.
SECTION 7. DEFINITIONS
For purposes of the standard contained in section 6 of this
revenue procedure, the following definitions must be used.
.01 Undergraduate student. The term "undergraduate student"
has the meaning attributed to that term in the Department of
Education regulations at 34 C.F.R. Section 674.2 (1997).
.02 Half-time undergraduate student. The term "half-time
undergraduate student" has the meaning attributed to that term in
the Department of Education regulations at 34 C.F.R.
Section 674.2 (1997).
.03 Graduate or professional student. The term "graduate or
professional student" means a student who--
(1) is enrolled at an institution of higher education for
the purpose of obtaining a degree, certificate, or other
recognized educational credential above the baccalaureate level
or is enrolled in a program leading to a professional degree;
(2) has completed the equivalent of at least three years of
full-time study at an institution of higher education, either
prior to entrance into the program or as part of the program
itself; and
(3) is not a postdoctoral student, postdoctoral fellow,
medical resident, or medical intern.
.04 Half-time graduate or professional student. The term
"half-time graduate or professional student" means an enrolled
graduate or professional student, as defined in section 7.03 of
this revenue procedure, who is carrying at least a half-time
academic workload at an institution of higher education as
determined by that institution according to its own standards and
practices.
SECTION 8. ANTI-ABUSE RULE
The standards in this revenue procedure must be applied in a
reasonable manner, consistent with the purpose of excluding from
employment only services that are performed as an incident to and
for the purpose of pursuing a course of study at a school,
college or university. See Section 31.3121(b)(10)-2(c). If the
standards are inappropriately applied in a manner that conflicts
with this underlying purpose so as to manipulate or
mischaracterize the nature of the relationship between an
employee and an institution of higher education, resulting in the
improper avoidance of payment of FICA taxes, then whether the
Student FICA exception applies will be determined on the basis of
all the facts and circumstances, rather than on the basis of the
specific standards set forth in sections 5 and 6 of this revenue
procedure. For example, the standards would be inappropriately
applied through the manipulation of the relationship between
employees and the institution of higher education if a university
claimed that the Student FICA exception applied to research
laboratory workers, who had been career employees, but were
converted to non-career status and required to enroll in a
certificate program granting six credit hours per semester for
work experience in the laboratory. As another example, if an
individual who was not a student worked for a university on a
full-time basis for many years, in a job generally performed by
non-students (but nonetheless failed to meet the literal
definition of career employee), and then enrolled at the
university for six credit hours of course work per semester while
continuing the full-time work in the same job, it may not be
appropriate to apply the standards of this revenue procedure to
conclude that the individual’s work has become incident to and
for the purpose of pursuing a course of study solely because the
individual enrolled for this course work. In both of these
examples, whether the work is performed incident to and for the
purpose of pursuing a course of study must be determined on the
basis of all the relevant facts and circumstances.
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