"Who is this guy FICA..."

Timothy Geithner, the president of the Federal Reserve Bank of New York, is Barack Obama’s nominee to become the next Treasury Secretary, i.e., the guy who hands out all the fat checks of bailout money. During his confirmation hearings, it has come to light that he filed his taxes improperly for three years running, and had to pay a bunch of back taxes. With interest.

Here’s what happened: In 2001, 2002, and 2003, Geithner was employed by the International Monetary Fund. Because the IMF is an international organization, they do not collect Social Security and Medicare taxes from their US employees (I remember the Friends episode where Rachel got her first paycheck ever: “Who is this guy FICA, and why does he get so much of my money”).

Now, the US employees of international organizations such as the IMF are not exempted from Social Security and Medicare taxes. Instead, even though the employees get a W-2, they also have to pay self employment taxes. That tax rate is about 15%, because the employee pays both halves: the half that is normally withheld from a paycheck, and the half that the employer normally pays without reporting it on the pay stub.

I remember the first time my wife took a foray into owning her own business, and encountered this self employment tax. Wife (in tears): “I worked so hard for that money. Now I have to pay 15%, plus more for income taxes? I don’t think it’s fair for the government to get so much of my money.” Husband: “Welcome to the Republican Party, my love.” But I digress.

Apparently, Mr. Geithner failed to report this self employment tax for those three years (plus a small portion of 2004, but who’s counting?). He did his taxes himself for 2001, and then used an accountant for 2002 and 2003 tax years. This oddity of being an employee, but still having to pay self employment taxes, only hits a few people. So it is perhaps understandable that both he and his accountant missed it. When the IRS caught up with him, he ‘fessed up and paid a settlement. No harm, no foul, right? Anybody can make a mistake, right?

Except that there are a couple of things that stand out in this situation.

First of all, the Treasury Secretary oversees the Internal Revenue Service. Shouldn’t the guy overseeing tax collection be able to, oh, I don’t know, do his own taxes without screwing it up?

Secondly, it turns out that the people who run the payroll at the IMF do know about this self employment tax loophole. For the US employees who have to pay the self employment tax, they add money to your salary to cover the 7.5% that the employer normally pays. The practice is called “grossing up,” as in they increase your gross pay by 7.5%.

Where it gets really interesting is that the gross up pay is paid out quarterly. So this raises the question: what did Geithner think those extra payments were for? Good behavior?

Think back sixteen years. When Bill Clinton was elected, his first pick for Attorney General was Zoe Baird. Ms. Baird, a high powered corporate attorney of considerable experience, was torpedoed when it came to light during the confirmation process that she had used an undocumented immigrant as household staff for several years, and that she had failed to pay the proper taxes for her employee. It was felt that the most senior law enforcement official in the US shouldn’t be someone who had broken the law.

Sixteen years later, a completely different political climate reigns. Mr. Geithner is almost certainly going to sail on to confirmation in the Senate. Still, it makes me wonder. How many other US employees of the IMF have gotten their taxes wrong this way?