In 2010, hospitals have an opportunity to claim a refund for prior FICA contributions on behalf of medical residents, and may also qualify for an employer exemption from their 6.2% Social Security payroll contribution for every newly hired qualified employee.

IRS Administrative Decision to Refund Medical Resident FICA

In March 2010, the Internal Revenue Service made an administrative determination to accept that medical residents are excepted from FICA taxes based on the “student exception” for tax periods ending before April 1, 2005. The IRS will be contacting hospitals, universities and medical residents who filed FICA refund claims for these periods within the next several months to provide more information and procedures. Hospitals with pending claims do not need to take any action at this time.

HIRE Act Provides Employer Exemption for 6.2% Social Security Payroll Contribution in 2010

Hospitals also can immediately take advantage of the HIRE Act, signed into law on March 18, 2010. At its core, the Act grants employers an exemption for their 6.2% Social Security (FICA) payroll contribution for every new qualified employee hired after February 3, 2010 and before January 1, 2011. The exemption is effective for wages paid from March 19, 2010 through December 31, 2010.

To qualify, a newly hired worker must certify, in a signed affidavit (IRS Form W-11 or another similar statement signed under penalty of perjury), that he or she: (i) has not worked for more than 40 hours during the 60-day period preceding the employee’s employment; (ii) is not being employed to replace another employee except one who quit voluntarily or was fired for cause (including downsizing); and (iii) is not “related” to the employer under rules set forth in the U.S. Tax Code. The IRS does not require submission of the affidavits, but an employer must maintain the affidavits with its payroll and income tax records.

The Act also allows an additional income tax credit equal to 6.2% of the paid wages for every new qualified employee retained for 52 consecutive weeks—up to $1,000—to be taken on the employer’s 2011 income tax. To qualify for this additional tax credit, the wages paid to the employee during the last 26 weeks must be at least 80% of wages paid for the first 26 weeks.