NRSA Fellows May Be Eligible for Substantial Tax Refunds

by Bertrand Harding, Jr.

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.

Those National Research Service Award fellows who have had social security (“FICA”) tax withheld from their NRSA stipends, and those fellows who may have paid self-employment tax on these stipends, should be able to file a claim with the IRS and obtain a refund of all of the FICA tax withheld, or self-employment tax paid, over a four- year period. 

By way of background, under the funding mechanism for the NIH’s NRSA program, the NIH transfers funds to the institution, and the institution, in turn, makes stipend payments to individual NRSA fellows. Because it is the institution that makes the stipend payment to the NRSA fellow, the institution is required to determine how to classify the payment for federal tax purposes. How the institution classifies the payment determines whether it withholds FICA tax from the stipend or whether the NRSA fellow pays self-employment tax on the stipend.

More specifically, there are three potential ways that an institution could treat a NRSA stipend payment:

  1. As wages paid to an employee providing research services for the institution;
  2. As a fee paid to an independent contractor providing research services to the institution; or
  3. As a fellowship grant to an individual engaged in independent research activities intended to further his or her own education.

Which of these classifications the institution chooses has a dramatic difference on the tax consequences to the NRSA fellow.

  • If the stipend is treated as wages, the institution will withhold FICA tax (7.65%) from the payment
  • If treated as an independent contractor fee, the institution will not withhold FICA tax, but the NRSA fellow will be subject to self-employment tax, which is equal to 15.3% of the amount of the stipend
  • If treated as a fellowship, the NRSA grantee has no FICA or self-employment tax liability

Over 25 years ago, the IRS issued a ruling holding that NRSA stipends represented wages for employee services rendered by the NRSA fellow, thereby requiring institutions to withhold FICA tax from the stipend payments. But in the early 1980s, the IRS withdrew this ruling, and since that time, the IRS has issued several rulings holding that NRSA stipends are bona fide fellowships that are not subject to FICA or self-employment taxes.

Nevertheless, some institutions continue to treat NRSA fellows as employees and withhold FICA tax from their NRSA stipends. Other institutions treat the NRSA stipend as an independent contractor fee, thereby requiring the NRSA fellow to pay the 15.3% self-employment tax on the amount of the stipend.

Because of the current IRS position that NRSA stipends are bona fide fellowships and therefore not subject to FICA or self-employment tax, any NRSA fellow who has had FICA tax withheld by the institution (or a fellow who has paid self-employment tax on NRSA stipends received) is potentially able to file a claim with the IRS for a refund of the withheld FICA tax or the paid self-employment tax.

The IRS permits taxpayers to file tax refund claims for the four prior tax years; therefore, the amount of the FICA or self-employment tax refund that a NRSA fellow might receive could be substantial. For example, assume that a NRSA fellow received stipends of $40,000 in 2005, 2004, 2003, and 2002 and that 7.65% of each year’s stipend ($3,060) was withheld as FICA taxes. This individual could be entitled to a FICA tax refund for these four years, totaling $12,240, plus interest. If the NRSA fellow had paid self-employment tax for the same four-year period, the refund would be $24,480, plus interest. The FICA taxes withheld (or self-employment taxes paid) during 2006 could be recouped by filing a refund claim following the close of the 2006 year.

The statute of limitations on refund claims works as follows: FICA taxes withheld (or self-employment taxes paid) during a calendar year are treated as paid on April 15 of the following year, and the individual has three years from that “deemed paid” date within which to file his or her refund claim. To illustrate: FICA taxes withheld during calendar year 2002 (or self-employment tax paid for 2002) are treated as paid on April 15, 2003, and any refund claim for these taxes must be filed within three years from April 15, 2003, or by April 15, 2006. If the claim is not filed by that date, it is lost.

Therefore, NRSA fellows have until April 15, 2006, to file refund claims for the 2002, 2003, 2004, and 2005 calendar years. If the claim is not filed by that date, the 2002 year is lost, but the remaining years remain open until April 15, 2007, at which time the 2003 year falls off, and so on.

Any NRSA fellow who would like more information on these potential FICA or self-employment tax refund claims and assistance in preparing and filing these claims with the IRS should contact me by phone at  (703) 683-8036 or by e-mail at bharding@erols.com .

About Bertrand M. Harding, Jr.

Mr. Harding is a tax attorney who operates his own law firm in Alexandria, VA, specializing in tax issues facing colleges and universities. He received his undergraduate degree from Duke University in 1968 and his law degree from George Washington University in 1975. After graduation from law school, he clerked for a Judge on the U.S. Tax Court. He joined the international law firm of Baker & McKenzie in 1977 and was elected to partner in 1984. He left Baker & McKenzie in 1996 to establish his own law firm.

Mr. Harding currently represents many public and private colleges and universities in connection with ongoing tax issues and has represented a number of schools in connection with IRS audits. He is the author of The Tax Law of Colleges and Universities, which is published by John Wiley & Sons, and publishes a monthly newsletter that is subscribed to by over 150 colleges and universities. He is a frequent speaker at NACUA and NACUBO tax conferences.

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