Washington

Tax officials at many colleges fear that a rule change proposed by the Internal Revenue Service could cost colleges millions of dollars by making nearly every student employee subject to Social Security taxes.

The revision would narrow the definition of "school, college, or university" by requiring education to be an organization's main goal. It would also narrow the definition of "student," disqualifying anyone who often works more than 40 hours a week, receives benefits, uses specialized knowledge, or needs a state or local license to do the job.

The broadly written rule, if applied as currently presented, could pose problems for every student who works on a college campus, said Bertrand M. Harding Jr., a lawyer in Alexandria, Va., who is an expert on tax issues affecting colleges. Graduate students who are research or teaching assistants would probably be most affected, he says, because their responsibilities frequently meet at least one of the criteria for exclusion.

Joseph R. Irvine, a tax lawyer at Ohio State University, said that in some states, all undergraduate and graduate students would be excluded because they are automatically eligible to participate in state-supported retirement plans. He predicts that colleges would have to pay millions of dollars in extra taxes, and that the additional cost would force them to hire fewer students to work on their campuses.

Don't Worry, IRS Says

The IRS says colleges should not worry. "We had research and teaching assistants in mind when crafting the rules," and the IRS considers them to be exempt from the taxes, said John Richards, senior counsel for the IRS's Office of the Chief Counsel for Tax-Exempt and Government Entities.

The proposed rule gives an example in which teaching assistants would remain exempt from the tax, and Mr. Richards said that research assistants would be likely to remain so, too.

But the example in the proposed rule uses a teaching assistant who would not meet any of the disqualifying criteria for the "student" definition. College officials say that many student employees, particularly graduate research assistants, would meet at least one of those conditions.

Colleges and many student employees each pay Social Security taxes equal to 7.7 percent of the students' salaries. Current regulations exempt students whose primary activity is studying, whom the IRS has defined as those who regularly attend classes in pursuit of a degree at a school, college, or university. The students also cannot meet any of the disqualifying criteria.

The proposed changes would narrow and crystallize the IRS's position that, in some jobs, students are employees more than they are students. The IRS has proposed the changes, Mr. Richards said, specifically with medical residents in mind.

The current exemption does not apply to medical residents, the IRS argues, because it considers them to be employees more than students. Furthermore, residents employed by hospitals are not exempt because the IRS has concluded that the main purpose of teaching hospitals is patient care, not education.

The IRS proposed the changes, Mr. Richards said, in response to two recent court cases in which federal judges ruled that medical residents should not pay Social Security taxes. In those cases, from 1998 and 2003, judges held that medical residents are students and that hospitals and other organizations can qualify as a "school, college, or university," even if education is not their main function.

The rulings have prompted more than 100 individuals, medical schools, and teaching hospitals nationwide to file claims for refunds worth hundreds of millions of dollars.

The proposed rule change is not a way, however, to avoid paying those claims, Mr. Richards said. The IRS plans to announce soon a program to resolve those disputes, he said.

A Tax or a Benefit?

The new rule would also update a procedure that allows colleges to exempt student employees who are enrolled at least half time and whose course work and employment "are separate activities, and not intermingled."

Mr. Richards expressed surprise at colleges' anxiety over the proposal, saying those that follow the standards should see little or no change in the number of students who must pay the taxes.

Mr. Irvine, of Ohio State, disagrees. He says that the rule change is the IRS's way to push more students into the Social Security system, and that students will be upset.

"Most people see Social Security as a tax," not a benefit, he said, because they do not think the system is fiscally healthy enough to give them a promised payout in the future.

The IRS is accepting comments on the proposed regulation through May 25. A hearing has been scheduled here for June 16. If the new rule is approved, which Mr. Harding says is likely by year's end, it would be effective retroactively, to February 25.