What Is the Section 3121(b) FICA Tax Exemption?
Section 3121(b) of the tax code defines when services are excluded from FICA. Learn the criteria for this exemption and how it affects tax obligations.
The Federal Insurance Contributions Act (FICA) mandates taxes on wages to fund Social Security and Medicare. These taxes apply to services defined as “employment” by the Internal Revenue Code. Section 3121(b) of the code outlines specific services that are excluded from this definition, meaning wages paid for these services are not subject to FICA taxes.
The Student Services Exception
A common FICA tax exclusion applies to services performed by a student for the school, college, or university where they are enrolled and regularly attending classes. For the exemption to apply, the student must be enrolled at the same institution where they work. The work performed must be secondary to the primary purpose of being a student.
The exemption is based on the principle that the employment is “incident to and for the purpose of pursuing a course of study.” This means the individual’s main relationship with the institution is educational, not professional. If an individual is primarily a career employee whose educational activities are secondary, this exemption would not apply.
Determining Student Eligibility
An institution determines if a student employee is exempt from FICA taxes by examining the specific “facts and circumstances” of their situation. To simplify this process, the IRS established safe harbor guidelines. These guidelines provide a clear standard that, if met, automatically qualifies the student’s wages for the exemption.
Under the safe harbor, an individual qualifies for the exemption if they are enrolled as at least a half-time student, based on standards set by the institution. The exemption can also apply during academic breaks of five weeks or less, such as winter or spring break, provided the student was eligible for the exemption on the last day of the preceding term and is eligible to enroll in the following term.
The safe harbor also requires that the individual not be a “career employee.” An employee is considered a career employee if their work schedule is full-time or if they are eligible for benefits not typically offered to students, such as retirement plan contributions or paid vacation leave. Postdoctoral students and medical residents are also not eligible for this exemption because their services are not considered incidental to a course of study.
Other Key Exclusions Under Section 3121(b)
An exclusion applies to services performed by a child under 18 in the employ of a parent’s business. This family employment exemption is valid only if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. It does not apply if the business is a corporation or a partnership with non-parent partners.
Another exclusion pertains to services performed for a foreign government or an international organization. Employees of foreign embassies, consulates, or designated international bodies are not subject to FICA taxes on their official wages.
An exemption also exists for certain nonresident aliens in the U.S. on specific nonimmigrant visas, such as F-1 or J-1 status. This applies when their employment is directly related to the purpose of their visa. As long as they maintain their nonresident alien tax status, their wages are not subject to FICA taxes.
Tax Reporting and Correcting Errors
On an employee’s Form W-2, Wage and Tax Statement, Box 1 will report the total wages paid for income tax purposes. If an exemption applies, Box 3 (Social Security wages) and Box 5 (Medicare wages) will either be zero or show a lower amount than Box 1, reflecting only the wages that were subject to FICA taxes.
If FICA taxes are withheld in error, the employee should first request a refund directly from the employer. If the employer agrees an error was made, they can reimburse the employee and file Form 941-X to correct the previously filed payroll tax return and claim a refund for the employer’s share.
If the employer is unable or unwilling to process the refund, the employee can file a claim directly with the IRS using Form 843, Claim for Refund and Request for Abatement. The employee should attach a copy of their W-2, proof of eligibility for the exemption, and a statement explaining their attempts to secure a refund from the employer.