The definition of who is a “student” challenged in court by IRS

If you work for an educational institution whose students provide services while learning, prepare to change your payroll systems. Depending how a court rules, you may have to end the practice of paying student stipends as a way of avoiding collection and payment of Social Security and other payroll taxes.

Recent case: Medical residents at the Detroit Medical Center must complete two years of post-graduate training before taking their medical board exams. While working at the center, they receive a stipend on which the hospital doesn't pay Social Security taxes.

The IRS sued, arguing that students should be classified as employees.

The 6th Circuit couldn't decide whether the residents were "students exempt from the taxes. It sent the case back to trial. The lower court will now try to sort out the definition of "students. (USA v. Detroit Medical Center, No. 07-1602, 6th Cir., 2009)