Supreme Court: Residents' earnings should be taxed

The Supreme Court unanimously ruled on Tuesday that medical residents will not be considered students under federal tax law. Instead, they will be treated as full-time employees, SCOTUSblog reports. As a consequence, they will not be exempt from Social Security taxes.

The payroll tax obligation will take effect on stipends paid to residents after April 1, 2005, generating an estimated $700 million a year. Hospitals and residents will have to split the tax, which equals 12.4 percent of wages, according to the Wall Street Journal Health Blog.

In the case, the IRS, which said residents were workers and subject to taxes, faced off against the Mayo Clinic, which contended that they were students and should not owe taxes.

The debate over whether medical residents were exempt from taxes started back in 1990, when Social Security officials decided residents were not eligible for a student exemption and decided to collect payroll taxes from the University of Minnesota. The Eighth Circuit Court overturned that decision and said residents were exempt. In 2004, the Department of Treasury decided to declare a blanket exclusion by excluding any worker from being treated as a student for payroll tax purposes if the worker put in at least 40 hours a week. Of course, residents do far more time than that in a given week.

In his opinion, Chief Justice John Roberts, Jr. upheld the Treasury's take as a "reasonable construction" of federal law. The court deferred to the Treasury. "Regulation, like legislation, often requires drawing lines," the Chief Justice wrote, reverting to the 2004 tax collector approach. "Focusing on the hours spent working and those spent in studies is a sensible way" to reach the Treasury's goal of focusing on workers who study, as opposed to students who work, he added.

To learn more:
- here's the Supreme Court's decision
- check out this Wall Street Journal Health Blog post
- read the SCOTUSblog post