IRS Revenue Ruling 71-15: Are Resident Stipends Taxable?
An analysis of IRS Revenue Ruling 71-15, clarifying the key distinctions that define medical resident stipends as taxable income rather than excludable grants.
IRS Revenue Ruling 71-15 is a directive that provides clarity on the tax treatment of stipends paid by hospitals to medical residents. This determination is based on the nature of the relationship between the resident and the hospital, analyzing the services performed and the primary purpose of the payment.
The Central Question Addressed by the Ruling
The ruling was established to resolve a conflict in how payments to medical residents were classified. On one hand, these payments could be seen as compensation for services, meaning the resident is being paid for work that provides a direct benefit to the hospital. This would make the payments taxable wages, similar to any other employee’s salary.
The alternative view was that these stipends were fellowship or scholarship grants. Under Internal Revenue Code Section 117, certain grants made primarily for an individual’s education and training can be excluded from taxable income. The core issue for the IRS was to determine if the primary purpose of the payment was to further the resident’s education or to compensate the resident for patient care services they provided to the hospital.
The IRS’s Determination and Rationale
Revenue Ruling 71-15 concluded that stipends paid to medical residents are compensation for services rendered and, therefore, are not excludable from income as a fellowship grant. The IRS’s rationale focused on the nature of the duties performed by the residents. The ruling determined that the hospital was the primary beneficiary of the residents’ activities, as they performed services, including patient care, that were integral to the hospital’s operations.
The IRS noted that residents work a regular schedule, are assigned duties by the hospital, and are supervised by hospital staff. Their work is not solely dictated by their individual training needs but by the patient care demands of the institution. Furthermore, residents often receive benefits typically associated with employment, such as paid vacation, sick leave, and laundry services, which reinforces the characterization of an employer-employee relationship.
Tax Implications for Medical Residents
Stipends are fully includable in a medical resident’s gross income. Because these payments are classified as wages, they are subject to federal income tax withholding, meaning the hospital will deduct taxes from each paycheck. The total annual earnings and taxes withheld are reported by the hospital to the resident and the IRS on Form W-2.
These wages are also subject to FICA taxes, which fund Social Security and Medicare. For most medical residents, the stipend is treated as standard employment income for all federal tax purposes.