Do Medical Residents Pay Income and FICA Taxes?

Medical residents are required to pay federal income taxes on the compensation they receive. This income, often referred to as a stipend or salary, is considered payment for services performed at a hospital or medical institution. For tax purposes, the Internal Revenue Service (IRS) views this compensation as wages, not a tax-exempt scholarship or fellowship grant. Consequently, it is subject to the same tax laws that apply to other wage earners.

Understanding Your Taxable Income

Each year, medical residents receive a Form W-2, Wage and Tax Statement, from their employer. This document details the total compensation paid and the taxes withheld throughout the year. The amount reported in Box 1 of the W-2 represents your total annual wages and is the starting point for calculating your federal taxable income.

This Box 1 amount is subject to federal income tax, and in most areas, state and local income taxes as well. This figure may differ from your total gross earnings because it reflects pre-tax deductions, such as your contributions to health insurance premiums or retirement plans. These deductions lower your reported taxable wages before any income tax is calculated.

The W-2 also reports the amount of federal income tax that has been withheld from your paychecks in Box 2. Your employer is required to send you this form by January 31 of the following year.

The FICA Tax Obligation

A tax responsibility for medical residents is the payment of FICA taxes. FICA stands for the Federal Insurance Contributions Act, and it is a mandatory payroll tax composed of Social Security and Medicare taxes. For years, a debate existed over whether medical residents were liable for these taxes, with many arguing they should be exempt under a “student” classification because residency is an extension of their medical education.

This issue was settled by the U.S. Supreme Court in the 2011 case Mayo Foundation v. United States. The Court ruled that medical residents are considered employees, not students, for FICA taxation because they work full-time providing patient care. The wages of medical residents are therefore subject to FICA tax withholding.

The Social Security tax is levied on earnings up to an annual limit, which is adjusted for inflation each year. The Medicare tax is levied on all of a resident’s wages without any income limit. Your W-2 will show the total wages subject to these taxes in Box 3 for Social Security and Box 5 for Medicare.

This ruling solidified the financial obligations for residents and their employing hospitals, which are responsible for withholding the employee’s share of FICA taxes and paying the employer’s matching share.

Common Tax Deductions and Credits

Medical residents can lower their tax liability through deductions and credits, though some education-related benefits are unavailable. One of the most relevant is the student loan interest deduction, which allows you to deduct up to $2,500 of the interest you paid on qualified student loans. This is an “above-the-line” deduction, meaning you can claim it even if you take the standard deduction.

To qualify for the full student loan interest deduction, your Modified Adjusted Gross Income (MAGI) must be below a certain threshold, which is updated annually. For single filers, the deduction is gradually reduced for those with a MAGI between $85,000 and $100,000 and is eliminated for those with a MAGI of $100,000 or more. You will receive a Form 1098-E from your loan servicer if you paid $600 or more in interest.

Medical residents are not eligible for other major education tax credits, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC is restricted to the first four years of postsecondary education, a requirement residents have surpassed. The LLC requires enrollment at an eligible educational institution for courses to acquire job skills, a definition that residency programs do not meet.

Retirement Savings as a Tax Reduction Strategy

Contributing to a retirement account is an effective strategy for medical residents to reduce their current taxable income. Many hospitals offer employer-sponsored retirement plans, such as a 401(k) or a 403(b). When you contribute to a traditional, pre-tax version of these accounts, the amount you contribute is subtracted from your gross income for the year.

This pre-tax contribution lowers your Adjusted Gross Income (AGI), which is a figure on your tax return used to calculate your tax liability. For instance, if you earn $60,000 and contribute $5,000 to a traditional 403(b), you will only be taxed on $55,000 of income for that year. This reduces your federal income tax and can also lower your state and local taxes.

The IRS sets annual limits on how much you can contribute to these plans. The money in these accounts grows tax-deferred, meaning you do not pay taxes on the investment earnings until you withdraw the funds in retirement.