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STUDENT EMPLOYEE FICA EXEMPTION

Payroll Services (PAY)

Policy 13

Effective: 04/01/2005

Last Modified Date: 05/31/2005

Introduction

Under the Federal Insurance Contributions Act (FICA), both employers and employees are subject to a tax on the amount of wages paid by the employer to the employee. Students who work for the University may be eligible for exemption from the FICA tax. Not all student wages are exempt from the FICA tax, and revised regulations from the Internal Revenue Service (IRS) set forth the criteria to determine which salaries and wages are exempt.

The FICA tax exemption pertains only to salaries and wages earned by students who are enrolled at UNC-Chapel Hill and providing employment services for the University. Payments that students receive for non-employment activities, such as scholarships, fellowships, traineeships, or services as an independent contractor, are not subject to the FICA tax because the payments are not compensation for services as an employee.

Background

Payments to employees for services are generally subject to the FICA tax unless an exemption from the tax is provided in the Internal Revenue Code. Section 3121(b)(10) of the Internal Revenue Code sets forth an exemption from the FICA tax for student employees. The IRS, however, does not permit all student employees to qualify for this FICA tax exemption; rather, the agency's policy is that only those student employees whose educational relationship with the school predominates over the person's "employee" relationship will qualify. This "balancing test" is reflected in the revised IRS regulations, which set forth a broad facts and circumstances test that should be used in making the determination whether a student employee qualifies for the student FICA exemption.

In addition to its regulations, the IRS has issued Revenue Procedure 2005-11, which sets forth certain "safe harbor" tests that, if met, will deem the student-employee to be exempt from FICA tax. In other words, if the student employee qualifies under these safe harbor rules, the person will be treated as exempt from FICA tax without the necessity of looking to the facts and circumstances test. The IRS recognizes that it may be possible for an individual to not meet the Revenue Procedure 2005-11 safe harbor tests and still qualify for the student FICA exemption by looking at the facts and circumstances surrounding the student's employment. Revenue Procedure 2005-11 is applicable with respect to services performed on or after April 1, 2005, and supercedes the earlier safe harbor tests set forth in Revenue Procedure 98-16.

Purpose of Policy

The purpose of this Payroll Policy 13 is to provide the standards for determining whether service in the employ of the University and performed by a student qualifies for the exemption from the FICA tax. As a general rule, the policy of the University will be to make student FICA determinations based on the Revenue Procedure 2005-11 safe harbor guidelines; that is, those student employees who meet these guidelines will be treated as exempt from FICA tax, while those student employees who do not will be subject to FICA tax on their wages. One exception to this general rule relates to teaching assistants, research assistants, and graduate assistants who may not meet the Revenue Procedure 2005-11 safe harbor guidelines but will nevertheless be treated as exempt from FICA tax under the student FICA exemption.

Please note that this Payroll Policy defines a "student" solely for purposes of applying the student FICA tax exemption. The policy's definition may vary from the definition of a student for employment or other purposes.

Criteria for Student FICA Tax Exemption under the Safe Harbor Tests

General Standards

Under the Revenue Procedure 2005-11 safe harbor rules, a wage payment made by the University to an individual who (a) is at least a half-time undergraduate student or at least a half-time graduate or professional student, (b) is not a full-time employee of the University, (c) is not a "professional employee," and (d) does not receive certain specified employment benefits will qualify for the student FICA exemption. Each of these elements of the safe harbor rules is described in detail below.

Student Enrollment Status

In determining whether an individual is a "student" of the University, the Payroll Office will rely on data in the Student Information System (as compiled for the report submitted to the National Student Loan Clearinghouse for student loans) and other relevant facts.

A half-time undergraduate, graduate, or professional student is an enrolled undergraduate, graduate, or professional student who is carrying a half-time academic load as determined by the University. The per-semester course loads that qualify the student for the FICA tax exemption under these safe harbor rules for the fall and spring semesters are as follows:

The course loads per session that qualify the student for the FICA tax exemption for the summer terms are as follows:

In addition, if a student is enrolled in any of the following programs, the person will qualify for the student FICA exemption:

Also, the University considers teaching assistants (payroll rank code 21), research assistants (payroll rank code 22), and graduate student assistants (payroll rank code 20) to be enrolled as full-time students.

Full-Time Employees

A full-time employee is an employee who is treated as such under the University's standards and practices. Regardless of the University's classification, however, any employee whose normal work schedule is 40 or more hours per week is treated as a full-time employee. 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 a week.

Professional Employees

A professional employee is an employee whose work: (a) requires knowledge of an advanced type in a field of science or learning, (b) requires the consistent exercise of discretion and judgment, and (c) is predominantly intellectual and varied in character. While teaching assistants, research assistants, and graduate assistants may qualify as professional employees under this standard and thereby not meet the Revenue Procedure 2005-11 safe harbor test, the University will nevertheless treat such student employees as eligible for the student FICA exemption under the facts and circumstances test, provided that the person's normal work schedule is not 40 or more hours a week.

Employment Benefits

A student employee does not qualify under the Revenue Procedure 2005-11 safe harbor rules if the employee is eligible to receive one or more of the following employment benefits:

As an example, an SPA employee who enrolls for a half-time academic course load would not qualify for the student FICA tax exemption because he/she is eligible for employment benefits.

Other Safe Harbor Rules

Revenue Procedure 2005-11 sets forth the following additional rules relating to the application of the safe harbor guidelines.

Graduating Students. A student who is less than half-time will still meet the safe harbor guidelines if the student is graduating. That is, an individual who is in the last semester or term of a course of study and is enrolled for the number of credit hours needed to complete the degree requirements will still be regarded as at least a half-time student, even if the student is enrolled in less than half the number of credit hours required of full-time students. Students must request and receive written approval from the appropriate dean's office to carry a course underload.

Changes in Student Status During Payroll Period. An individual's status as a student may change during the academic year based on his/her academic pursuits. For example, if an individual ceased being a "student" on January 10, the person would remain eligible for the student FICA exemption until the end of that payroll period. The FICA tax exemption applies to all payroll periods that are wholly or partially within the academic semester or term for which the individual has the status of a student. Also, if the individual qualifies as a student for any part of a listed payroll period, but does not qualify as a student for the entire payroll period, the individual will be eligible for the student FICA exemption for the entire payroll period. Payments to individuals with student status during the semester or term listed will qualify for the student FICA tax exemption for the corresponding pay periods.

School Breaks. An individual working for the University during the summer or during other school breaks of more than 5 weeks, but who does not have the status of a student during this period as defined in this policy, is not eligible for the student FICA exemption on wages paid during the period. The student FICA tax exemption does apply to school breaks of 5 weeks or less provided the individual is a continuing student. That is, in order to be eligible for the FICA tax exemption during school breaks of 5 weeks or less, the individual must qualify for the FICA tax exemption on the last day of the semester or term preceding the break and be eligible to enroll for classes in the first semester or term following the break.

Other Employee Groups. According to Revenue Procedure 2005-11, the safe harbor guidelines are not available for those 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. Accordingly, it is the University's policy that payments to clinical fellows (payroll rank code 24), residents (payroll rank code 25), and postdoctoral research associates (payroll rank code 28) are not eligible for the student FICA exemption. Please refer to the following table for definitions of student payroll rank codes.

Code Title Definition
20 Graduate Student Temporary Employment (Graduate Assistant) A graduate student, enrolled as a full-time student in accordance with their program of study, who performs support functions, and is not a Teaching Assistant or Research Assistant as defined below.
21 Teaching Assistant A graduate student, enrolled full-time in accordance with their program of study, who regularly teaches a class or classes; supervises recitation sections; has full responsibility of a course, or leads discussions sections; or grades papers and exams; or supervises a laboratory section or sections; under the supervision of a member of the graduate faculty.
22 Research Assistant A graduate student, enrolled full-time in accordance with their program of study, and is engaged in research activities directly related to their program of study under the supervision or in collaboration with a member of the graduate faculty.
23 Predoctoral Fellow-Trainee A graduate student, enrolled full-time in accordance with their program of study, who holds a sponsored fellowship or traineeship, and receives a stipend or training payment (e.g. NSF Fellowship, NIH Training Grants, or Graduate School Fellows).
24 Clinical Fellows A dentist (DDS) or physician (MD) fully trained and engaged in further training within a subspecialty.
25 Resident A dentist (DDS) or physician (MD) engaged in post-graduate training.
26 Undergraduate Assistant An undergraduate student, enrolled full-time in accordance with their baccalaureate program of study, and is engaged in a work assignment. (e.g. tutors, athletic interns, athletic managers, outreach counselors)
27 Postdoctoral Fellow/Trainee An individual with an earned doctorate, who holds a sponsored postdoctoral fellowship or traineeship, who is engaged in postdoctoral continuing education and/or training through research for a fixed period of time not holding a faculty appointment, but no more than three years, and receives a stipend or training payment.
28 Postdoctoral Research Associate An individual with an earned doctorate, who is engaged in postdoctoral continuing education and/or training through research for a fixed period of time not holding a faculty appointment, but no more than three years, and receives compensation for services performed.

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