Geithner's taxes and IRS forms

A reader writes, suggesting that no IRS form existed for Timothy Geithner to file self-employment taxes, because he wasn't self-employed:

I have a friend who used to be the top payroll tax expert for one of the "final four" accounting firms.

According to her:

-    there is no IRS form (or any easy method) for a person who is not self-employed to use to report Social Security taxes to the IRS, and

-    this is a long standing problem that practitioners have been aware about for years.

Rosslyn Smith responds:

This is correct. The IRS does not provide a specific form for those who are employees in the common law meaning of the term but whose employer is not legally compelled to calculate and remit employment taxes on their behalf. That is understandable because the number of filers in this position is quite small. The administrative inconvenience of remitting them on forms not precisely designed for the task does not serve as an excuse for not paying them at all. .  The facts remain that the IMF provided ample guidance that such taxes were due by informing its U.S. employees on a quarterly basis of their compensation and reminding them they were responsible for paying their own U.S. income and employment taxes via estimated tax payments similar to the way the self employed remit their taxes.   


My main point remains valid. The prompts and diagnostics in tax preparation software programs for self prepared returns serve to reinforce the guidance already received from the IMF.  The technically correct way to file the return for an employee of the IMF would be to report the income as salary as if a W-2 had been received and then override the system as necessary to force the calculation of employment taxes as if the taxpayer had been self employed. While Turbo Tax would not specifically direct a user to do this, when a taxpayer enters a gross salary or wage number in the system asks for a great many additional numbers: Federal taxable wages, FICA wages, Medicare wages, FICA withholding, Medicare withholding, Federal income tax withheld, State taxable wages, State income tax withholding, City taxes wages, etc.  Each click of the mouse past these fields underscores the unique situation of IMF employees in not having such amounts calculated and withheld from their salary.  Furthermore, if quarterly estimated tax payments in an amount sufficient to cover both income and employment taxes as advised by the IMF had been remitted the size of the refund would also serve as another prompt that employment taxes still need to be calculated. 


Maybe I am unduly cynical, but it seems to me that someone who now argues that he only followed the default settings of a commercial software program and by golly it yielded a short term benefit in his favor may not be a financial genius whose leadership is indispensable to solving the current financial mess.  As I noted in an earlier blog item, it has been my experience that executives who are reimbursed for taxes on a grossed up basis as Geithner was are usually keen to find out if they were, in fact, made whole for their unique circumstances.  That a numbers guy like Geithner did not recalculate his income tax and employee's share of payroll taxes based upon only his base compensation and then compare that number net of tax to what he actually netted from the IMF under their gross up strikes me as highly improbable.


There is more irony here. From a practical point of view I suspect that employees in the small group of those who do not have income and employment taxes withheld and who also prepare their own returns are likely to enter the income received on Schedule C, Income from Self Employment.  Doing this generates the necessary employment tax calculation but is not technically correct. Those who work for the IMF are under supervision and control and therefore are not within the common law definition of a self employed individual.  Thus they may not be entitled to many deductions against gross income available to those who are genuinely self employed. These would include the subtraction for one half of the employment taxes from gross income the software will automatically generate. The eligibility for contributions to certain retirement plans may also be an issue. In addition, self employed individuals are entitled to take certain expenses directly against income while employees are only allowed to take non reimbursed expenses as an itemized deduction and then only if they exceed two percent of adjusted gross income.  It should be noted that taking such adjustments when not eligible to do so results in an underpayment of income as opposed to employment taxes. It is ironic that a return prepared in this manner and later adjusted on audit can, in fact, be defended both as evidence that our income tax system is unduly complicated and that the taxpayer relied too much on the tax software to calculate his liability. The failure to pay any employment taxes at all after being specifically reimbursed for the amount payable only serves to makes one look like a crook.
A reader writes, suggesting that no IRS form existed for Timothy Geithner to file self-employment taxes, because he wasn't self-employed:

I have a friend who used to be the top payroll tax expert for one of the "final four" accounting firms.

According to her:

-    there is no IRS form (or any easy method) for a person who is not self-employed to use to report Social Security taxes to the IRS, and

-    this is a long standing problem that practitioners have been aware about for years.

Rosslyn Smith responds:

This is correct. The IRS does not provide a specific form for those who are employees in the common law meaning of the term but whose employer is not legally compelled to calculate and remit employment taxes on their behalf. That is understandable because the number of filers in this position is quite small. The administrative inconvenience of remitting them on forms not precisely designed for the task does not serve as an excuse for not paying them at all. .  The facts remain that the IMF provided ample guidance that such taxes were due by informing its U.S. employees on a quarterly basis of their compensation and reminding them they were responsible for paying their own U.S. income and employment taxes via estimated tax payments similar to the way the self employed remit their taxes.   


My main point remains valid. The prompts and diagnostics in tax preparation software programs for self prepared returns serve to reinforce the guidance already received from the IMF.  The technically correct way to file the return for an employee of the IMF would be to report the income as salary as if a W-2 had been received and then override the system as necessary to force the calculation of employment taxes as if the taxpayer had been self employed. While Turbo Tax would not specifically direct a user to do this, when a taxpayer enters a gross salary or wage number in the system asks for a great many additional numbers: Federal taxable wages, FICA wages, Medicare wages, FICA withholding, Medicare withholding, Federal income tax withheld, State taxable wages, State income tax withholding, City taxes wages, etc.  Each click of the mouse past these fields underscores the unique situation of IMF employees in not having such amounts calculated and withheld from their salary.  Furthermore, if quarterly estimated tax payments in an amount sufficient to cover both income and employment taxes as advised by the IMF had been remitted the size of the refund would also serve as another prompt that employment taxes still need to be calculated. 


Maybe I am unduly cynical, but it seems to me that someone who now argues that he only followed the default settings of a commercial software program and by golly it yielded a short term benefit in his favor may not be a financial genius whose leadership is indispensable to solving the current financial mess.  As I noted in an earlier blog item, it has been my experience that executives who are reimbursed for taxes on a grossed up basis as Geithner was are usually keen to find out if they were, in fact, made whole for their unique circumstances.  That a numbers guy like Geithner did not recalculate his income tax and employee's share of payroll taxes based upon only his base compensation and then compare that number net of tax to what he actually netted from the IMF under their gross up strikes me as highly improbable.


There is more irony here. From a practical point of view I suspect that employees in the small group of those who do not have income and employment taxes withheld and who also prepare their own returns are likely to enter the income received on Schedule C, Income from Self Employment.  Doing this generates the necessary employment tax calculation but is not technically correct. Those who work for the IMF are under supervision and control and therefore are not within the common law definition of a self employed individual.  Thus they may not be entitled to many deductions against gross income available to those who are genuinely self employed. These would include the subtraction for one half of the employment taxes from gross income the software will automatically generate. The eligibility for contributions to certain retirement plans may also be an issue. In addition, self employed individuals are entitled to take certain expenses directly against income while employees are only allowed to take non reimbursed expenses as an itemized deduction and then only if they exceed two percent of adjusted gross income.  It should be noted that taking such adjustments when not eligible to do so results in an underpayment of income as opposed to employment taxes. It is ironic that a return prepared in this manner and later adjusted on audit can, in fact, be defended both as evidence that our income tax system is unduly complicated and that the taxpayer relied too much on the tax software to calculate his liability. The failure to pay any employment taxes at all after being specifically reimbursed for the amount payable only serves to makes one look like a crook.