Egg on My Face: Grad Students and Payroll Taxes
I feel very silly! Here I am trying to set myself up as a reliable (but not professional!) source for information on the special PF situations graduate students find themselves in, particularly with respect to taxes, and I was overlooking something very obvious for years in my own finances!
This all started when I had a post idea about for what I wish I’d used my 2% payroll tax break (and asking you what you wish you’d done). I wondered what we had done with that 2%, so I went back in the trends section in our mint account to see how our income/budget changed from the end of 2010 to the beginning of 2011. I was surprised to find that our take-home pay actually decreased during that time, and only increased around the time of the year that we get our raises (September). I figured something went wonky with our withholdings at that year transition since we had gotten married earlier in 2010, so I accessed my past pay stubs to directly check how the withholdings had changed.
To my surprise, going back through my paystubs showed me that I haven’t had withholdings taken from my stipend for Social Security or Medicare from my second year of grad school forward! (I’m fairly confident they weren’t taken out in the first year, either.)
How is it that I’ve never noticed that I’m not paying payroll taxes?! I admit I almost never look at my pay stubs and that I pay nearly all my attention to budgeting our take-home pay and calculating percentages from our gross pay. I’ve even mentioned payroll taxes here on the blog – I listed not paying them as an advantage to being paid with a 1099-MISC and I had a good exchange with a commenter (Joe) about whether it’s better to be paid with a 1099-MISC or W-2 for investing purposes. In both cases I thought/assumed that 1099-MISC recipients do not have to pay payroll taxes (because their income is not “earned”) but W-2 recipients do. How could I not have checked my own pay stubs to verify that I was having the payroll taxes withheld? For goodness sakes, I even wrote a post about how our budget would change based on the resolution of the fiscal cliff, heavily assuming that we had experienced the payroll tax reduction!
I looked through Kyle’s pay stubs as well, and, strangely, he had payroll taxes removed in July 2009 but not in a single month since then, and our current payroll system doesn’t have records from before then. So it seems that it might depend on how you’re paid whether or not payroll taxes are withheld? Or maybe that was a mistake?
I tried to Google the answer to this and the closest I got was and ehow article that stated “Graduate students working on a dissertation are exempt from FICA withholding. Students who work for an educational institution are exempt if their primary relationship with the institution is that of a student.” From that description it would seem that any PhD student would be exempt, but I knew I need to go straight to the source.
From the IRS website:
“FICA (Social Security and Medicare) taxes do not apply to service performed by students employed by a school, college or university where the student is pursuing a course of study. Whether the organization is a school, college or university depends on the organization’s primary function. In addition, whether employees are students for this purpose requires examining the individual’s employment relationship with the employer to determine if employment or education is predominant in the relationship.”
My lay opinion is that we would always be “students” with respect to our universities, but my instincts have been wrong before with regard to why students receive stipends. There are a few other documents that touch on this topic linked from the above page, but honestly I found them incredibly difficult to parse as they were notes/letters instead of the polished publications I normally read from the IRS.
Part of what made another one of these documents confusing was that they were trying to clarify previous statements. For instance, they had said that an employee must be “enrolled and regularly attending classes” to qualify for the exemption. My reaction was ‘We don’t take classes after our first couple years!’ But then it goes on to explain that “Traditional classroom activities are not the sole means of satisfying this requirement. For example, research activities under the supervision of a faculty advisor necessary to complete the requirements for a Ph.D. degree may constitute classes within the meaning of section 3121(b)(10). The frequency of these and similar activities determines whether an employee may be considered to be regularly attending classes.” So that makes it seem like the entire PhD process should qualify for exemption.
Thinking back to my work-study undergraduate days, I’m fairly sure I had FICA taxes withheld, but maybe that was because the services I performed were not directly in pursuit of my “course of study.” For instance, if a grad student is being paid for TAing, FICA probably would be withheld, since TAing isn’t in direct pursuit of a degree, while RAing is (if enrolled).
I’m very confused and I think I’ll pursue this further by talking with some administrators at my university. But in any case it looks like we won’t experience a reduction in take-home pay this month like virtually everyone else!
Can anyone shed some light on this situation? When you were a student did you have payroll taxes withheld and for what kind of work (1099 MISC vs. W-2, fellowship vs. RA vs. TA)? Why should students have an exemption from payroll taxes? Do any non-students have exemptions?
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Filed under: grad school, taxes · Tags: 1099-MISC, FICA, graduate students, medicare, payroll taxes, social security, W-2
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Well the good news is your taxes aren’t going up! I feel like I learn something new about my paystub everytime I look at it, so I know how you feel.
It shouldn’t be that complicated, but I had to look up several acronyms on this last go-round…
I don’t have my returns going all the way back to when I was in school and had a campus job, but I’m fairly certain I remember not having FICA taken out for my mail-room job.
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Hm, safe to say that didn’t contribute directly to your studies… I will have to re-check my workstudy forms. I think I still have all my documents from my last year of college.
I never had any taken out of my assistantship & stipend checks, so I’m guessing you’re in the clear?
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Were you only paid for doing research or did you TA as well?
This is something that’s come up at my university, as very vague talks about possible grad student unionizing received a warning from the dean that doing so might give us standing as “employees,” not “students,” and our tax liabilities would go up as a result. There are plenty of public schools where graduate students have unions, though, so I am curious whether they actually have payroll taxes withdrawn, or are still considered primarily students (I sort of suspect the motivation behind the warning was more like intimidation than clarification, but I don’t actually know).
I have not had FICA withheld for work study as an undergrad, or fellowship as a grad, but I don’t remember about TAing. Would be easy to check though, as I was an assistant for the first half of 2012.
I’ve never heard of grad student unionizing! I’ll have to look into that.
One of my friends told me he had FICA removed for his TAing pay so that’s what I’m trying to track down. I’ve TA’d twice but it’s part of my requirements for graduating so we don’t get paid for that, specifically. Isn’t that crazy?
It’s currently not legal at private schools because grad students are considered students exclusively, but for some reason at state schools this is not the case and there are grad student unions at some places, like UMich.
Thanks for the lead, I will ask my Michigan friends where I can find info about this!
I agree that this is very confusing. I also don’t have SS taken out of my paycheck, and I’m currently being paid partially on a TA and partially on a RA. In addition, I usually get a W-2 and also a letter stating that I was given money for “proving no services” <- whatever that means. It all adds up to the correct amounts in the end but I agree that it's very confusing!
Woah. Woah. You TA’d, got a W-2, AND they gave you a letter saying you provided no services?! That is so insulting! And incorrect, according to the research I’ve done. Did you find it changed anything you did with your taxes like contributing to an IRA?
It’s insulting in a way but I think it’s probably less of an evaluation of the value of the work, and more of a way to get around paying both the employer and employee portions of payroll tax by calling it part of the course of study…so I wouldn’t take it too personally!
I don’t like that the way they imagine us for taxes and payroll purposes is so removed from reality! And it seems to be applied inconsistently…
I checked and I have never had FICA withheld. There are some semesters I’m on fellowship, and for fellowship semesters I do not have FICA or income tax withheld and the income is not reported on a 1099 or W-2 (it is up to me to report and pay estimated tax). The semesters I’m a TA, I have federal and state income tax withheld but no FICA withheld, and it is reported on a W-2. TA’ing is not required as part of my program. Back when I was an undergrad my on-campus job also didn’t have FICA withheld.
I’ve also been advised that income in fellowship semesters is unearned income because you are only pursuing studies and not working. So it shouldn’t be reported by the university and you are not eligible to contribute to an IRA. Then for TA semesters, because you are not working more than 50% time and are enrolled full time (see http://www.uwsa.edu/fadmin/gapp/gapp18a.htm ) then FICA is not withheld. However, TA income is still earned income and reported on a W-2, and so counts for contributing to an IRA.
I was also told that students should essentially never be paid with a 1099 as they are usually not independent contractors, by IRS rules.
ALSO, none of the above applies to international students here on a student visa (subject to different rules) Whew, tax policy for grad students is so complex.
Glad to hear from you again, Joe! Thanks for checking your records about FICA.
I think that what you were told about the earned and unearned income is correct (although I dispute their definition of ‘working’!). Thanks for the link.
The 1099 MISC is an appropriate form for universities to use for fellowship pay that does not require any work (which I claim doesn’t exist). While independent contractors are the most common recipients of a 1099-MISC, there are other uses like for prizes and fellowships – this is the distinction between box 7 and box 3 on the form. People think that 1099-MISC automatically means self-employment, but that only applies to box 7.
I think the IRS is pretty clear on the matter, because on the instructions for form 1099 they state:
“Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2. Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported by you to the IRS on any form. See Notice 87-31, 1987-1 C.B. 475, and Regulations section 1.6041-3(n) for
more information.”
http://www.irs.gov/instructions/i1099msc/ar02.html
I think the key distinguishing factor between ‘working’ and ‘not working’ might be whether the pay is conditional on performing some job (TA, research, etc) and if you don’t do the job they stop paying, whereas a fellowship is only conditional on attendance (i.e. as long as you’re ‘enrolled’ for that semester you get the stipend)
I agree on the documentation regarding fellowships – I referenced the same passage in my post on grad student pay and Roth IRAs. I just think it’s ludicrous for the universities and other organizations to claim that fellowships have no conditions of doing research. For example, for one of my fellowships I had to write up a summary of my research accomplishments over the time they were paying me.
I am not an accountant or tax attorney, but I can tell you that I got a letter about 2 years ago stating that FICA was erroneously withheld based upon my course of studies in the mid/late 90’s. Got a refund check from the IRS about a month ago for $600.
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Wooooooow. I can’t believe they went back that far! Maybe we will receive on in 15 years for what was withheld from Kyle’s paycheck.
That is a little scary for mistaken IRA contributions, though!
Great post! Each year I get a statement from Social Security (this newsprint-like booklet with black and green ink). It has FICA records going back to my high school job. Your realization now makes the recent years of my statement clear:
On my most recent statement (dated Sept 2012), in the column for 2010 (my first full year as a grad student, and my first full year on a fellowship/stipend) I had not paid anything to Social Security/Medicare. I thought this was because of the fellowship. For 2011 it says “Not Yet Reported” and 2012 didn’t say anything. So now I know what to expect; 2011 and 2012 should both report $0!
And yes, I learn something every time I look at financial stuff. I think that’s why I still do my own taxes. 🙂
I’ve gotten one of those booklets in the past, but definitely not yearly – and it had lots of mistakes in it! Checking it yearly would definitely be easier than once a decade.
I hope you’ll continue to see $0 contributed through grad school – although as of now, it’s not clear to me whether TAing is taxable in this way/not furthering degree progress, if you have to do that at all.
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Reading the comments, I can say I am a grad student that is a TA, and part of the Teaching Assistant Union, and I do not have FICA taxes witheld. It specifically states in our offer letters that we will not be paying FICA, but it also includes a line saying that if we take a concurrent job also with the univeristy we will need to start paying FICA taxes on both sets of income. (It appears that this has to do with the quote about full time student, but working 20hours or less a week, and as such qualifying as a Student not an employee.)
I have not heard of the union having anything to do with it, but I go to a state university in a state that is quite well known for unions, so the laws may be slightly differed ( although FICA taxes are federal taxes, so not sure why it would matter state by state).
I hope this helps.
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Thanks for inputting your data! What does your union do for you and how much are the dues?
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My daughter recently received a check out of the blue for a significant amount as a refund of payroll taxes taken out of her medical residency pay ten years ago! Half of the amount was interest, which of course will be taxable.
I guest that’s treated the same as grad students.
Hm, that seems odd to me as residents are the training-equivalent of postdocs, and I know postdocs are not exempt from FICA.
From this document, “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 incident to and for the purpose of pursuing a course of study.”
Just noticed that the last link at http://www.irs.gov/Charities-&-Non-Profits/Student-Exception-to-FICA-Tax (from your original post) is to an appellate court decision that included medical residents.
I’m guessing it was retroactive to ~2004 base on the IRS dates and on the amount that my daughter should get back. [The check is “in the mail”.]
That’s definitely possible. It’s hard to keep up with all the changes since they don’t have extensive current documentation!
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I noticed my (undergrad) son’s W-2 didn’t have any payroll taxes taken out and was concerned. I called the payroll office and was told that students did not pay payroll tax. He has an on- campus job in the student center game room. It is not work-study. Amazing- I thought payroll taxes were always a given- learn something new every day!
Yeah, that doesn’t make sense to me but it seems to be a common interpretation!
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Interesting notes on the graduate school income. But I should say that earnings on the side, reported via a 1099 are indeed subject to FICA (unless, as you point out, those earnings are coming from a college, school, or university). In fact, if you have earnings from a 1099 you have to pay the full FICA amount (15.3%) whereas with a W2 you only pay half (the employer pays the other half).
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The difference is that self-employment income is reported on Form 1099-MISC in box 7, whereas fellowship income is reported on Form 1099-MISC in box 3. Since Box 3 or “Other” income is not wages, it is not subject to FICA taxes (either side).
YOU DO NOT HAVE TO PAY FICA OR SOCIAL SECURITY TAXES ON A STIPEND EVER
Thanks for this comment! Yes, it took me a little while to realize that students have a FICA exemption on work performed related to their degrees!
THEY SHOULD HAVE GIVEN YOU A 1098 T
Actually, universities do not have to issue 1098-Ts to students whose scholarship/grant income exceeds their qualified education expenses.
Instructions for Forms 1098-E and 1098-T (2017) (p. 2)
“File Form 1098-T, Tuition Statement, if you are an eligible educational institution. You must file for each student you enroll and for whom a reportable transaction is made… Exceptions. You do not have to file Form 1098-T or furnish a statement for: … Students whose qualified tuition and related expenses are entirely waived or paid entirely with scholarships”