Timothy Geithner, the President of the NY Fed, is President-elect Obama's nominee for Treasury Secretary.
According to the news reports, he's experienced the same "bed buffaloes" as some of our VITA site clients do with their self-employment taxes.
In yesterday's class, I mentioned that many of our "self-employed" clients with 1099-MISC income or cash receipts from customers do not realize that they are self-employed "independent contractors" and must file a Schedule C-EZ (or Schedule C) to report their income as well as a Schedule SE to compute the Social Security and Medicare taxes due on that income.
Most typical employees with W-2 income don't have to worry about figuring their Social Security and Medicare taxes. Their employer does that automatically every pay period and remits the correct amounts directly to the government throughout the year. (Those amounts are reported to the employee in boxes 4 and 6 of the W-2 at the end of the year.)
But a number of our clients received compensation from the organizations that hire their services without any withholding whatsoever. The organizations that paid them don't issue W-2, they issue 1099-MISC with the amount of the payment include in box 7 as "Non-employee" compensation. Such people are technically considered "self-employed" and liable for reporting and paying their own payroll taxes (Social Security and Medicare, collectively referred to as FICA.)
Our clients are often surprised when we explain that the IRS considers them "self-employed" and liable for those FICA taxes. It's not surprising that they are surprised--as we've seen the tax code is complicated and confusing, and our clients generally have limited backgrounds in financial issues.
What IS surprising is that Mr. Geithner would be surprised by his obligation to pay self-employment FICA taxes on his income. He has graduate training in economics and held many senior positions in the US Treasury Department in the 1990s prior to taking the IMF job which caused his tax difficulties. (The IRS is part of the Treasury Department.) Moreover the IMF provided him with very clear documents that explicitly described his obligation to pay self-employment taxes. (In a rather strange anomaly, they actually paid him W-2 income, but they quite explicitly told him that the IRS would consider him "self-employed" for the purpose of filing and paying self-employment Social Security and Medicare taxes.)
However, despite his education and his background working for the Treasury Department, the New York Times and other newspapers are reporting that he was unaware of his obligation to pay self-employment taxes on his IMF income until he was audited several years after he filed his tax returns. In some years, he prepared his own tax returns using software, and in other years, he hired a paid preparer to help in. His tax returns were filed incorrectly in all years when he worked for the IMF. He also made other mistakes according to documents released by the Senate Finance Committee, which is preparing to consider his nomination.
In many ways, Mr. Geithner has much less excuse than our VITA clients for getting his self-employment tax filings wrong. Typically, the businesses that hire our VITA clients on a "self-employed" basis don't warn them that they need to file Schedule SE and pay self-employment tax. And those businesses generally don't give their employees earmarked extra money with which to pay those self-employment taxes. Not only did the IMF warn Mr. Geithner about his self-employment tax liability, it gave him extra money explicitly designated to pay those taxes! And he even signed an IMF form requesting that extra money for that very purpose.