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Current and Recent NRSA Fellows May Be Eligible for Substantial Tax Refunds: Background

by Geoff Davis

Editor's Note: This article is for informational purposes only and does not constitute tax or legal advice.  If you want tax or legal advice, please contact a qualified tax professional / lawyer.

Back in April 2005, Science published a story that alarmed many universities.  The reason: "A new IRS regulation that goes into effect on 1 April requires institutions to begin withholding federal payroll taxes from the incomes of all postdocs and makes no exception for holders of fellowships such as NIH's Ruth L. Kirschstein National Research Service Awards (NRSAs) and similar fellowships."  The regulation would mean that NRSA postdocs would have to pay an additional 7.65% of their income for social security (FICA) and unemployment (FUTA) taxes, and so would the institutions at which they work. All told, the new taxes would cost universities and NRSA fellows roughly $10,000,000 per year.

In a follow up article a few weeks later, Jim Austin, the editor of Science's Next Wave, reported that the original Science article was incorrect.  Science was alerted to the error by tax attorney Bertrand Harding, Jr., author of The Tax Law of Colleges and Universities: "...the IRS case law is clear: people on NRSA fellowships are not employees, so they don't owe FICA or FUTA," said Harding.  After a bit of sleuthing, Jim tracked down a person at the IRS who was able to confirm Harding's assessment: "Our position with respect to NRSA fellows is clear: those people are not subject to [FICA and FUTA] taxation."

Here is the interesting thing: according to Sigma Xi Postdoc Survey data, nearly half (46%) of the NRSA fellows surveyed were already paying thousands dollars per year in FICA taxes even though, according to Harding and the IRS, they do not owe these taxes.  In addition, 15% said that they paid self employment taxes (the employer's half of FICA/FUTA), which doubled their FICA bill.  I am no tax professional, but if the Sigma Xi numbers are true of the NRSA population as a whole, then by my back-of-the-envelope calculation, it looks like NRSA fellows are paying about $2.8 million dollars per year in FICA taxes (1500 NRSA postdocs × (46% paying FICA + 15% paying self-employment tax) × $40,000 earned per year × 7.65% FICA).

I met Bertrand Harding, Jr. at the Association of American Medical Colleges' GREAT Group Meeting in October and asked him what a postdoc who had paid FICA taxes could do. Here is what he had to say.

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