Solo W-2, Inc. Could Have Saved Timothy Geithner

January 16, 2009 – 5:25 pm

Oops!

There is no doubt that Timothy Geithner, who runs the New York Federal Reserve bank, is a bright man. After all, that is why President elect Barack Obama has nominated him to be the next Secretary of the Treasury of the United States. And, no one will argue that Geithner lacks a keen understanding of money and taxes. During the Clinton Administration, Geithner worked in a senior position in the U.S. Treasury Department. Both his training and his experience have taught him much about the U.S. tax system.

On the other hand, Geithner rubs shoulders daily with the very same Wall Street gurus - dare I say weasels? - who perfected short selling, re-packaging of sub-prime loans and all sorts of additional financial obscenities that have driven this country’s economy into the ground. And, then, maybe that’s the problem. Maybe Geithner acquired a little too much greedy thinking during all that shoulder rubbing with all those Wall Street gurus.

Then, again, what he did may have been an honest mistake. What Geithner did, using off-the-shelf tax-preparation software, is fail to pay $34,023 in Social Security and Medicare taxes that Geithner owed on money he earned from 2001 to 2004 while working as a self-employed independent contractor for the International Monetary Fund.

Employers are required to withhold taxes from the wages they pay to employees. Clients (in this case, the IMF) are not required to withhold taxes from the payments they make to vendors (in this case, Timothy Geithner). Clients simply cut a check to the vendor and log the amount as a business expense.

Surely, Timothy Geithner knew he was working as a vendor and not as an employee of the IMF and, just as surely, both his training and his experience, not to mention his tax-preparation software, should have informed him that he owed taxes on revenues he collected as an independent contractor.

And there’s the rub. As Secretary of the Treasury, Geithner would oversee the IRS, the very agency to which he “forgot” to pay his Social Security and Medicare taxes. Also, as Secretary of the Treasury, Geithner would report directly to the President, advising Obama on the best ways to reform Social Security and Medicare, the intended recipients of the taxes he failed to pay.

Both the IMF and Geithner Would Have Benefited from Using Solo W-2, Inc.

Major companies that use consultants and other forms of contingent labor often refer independent professionals to an employer of record to mitigate the risks of co-employment for non-compliant workers who lack the customary trappings of a legitimate business, such as liability insurance, a business license, separate business bank account, separate tax ID and separate tax filings for their business, multiple clients and so forth. This is especially important when the individual will be working under the close supervision of company employees who will control the details of how the work is to be performed.

Companies can reduce the risks of co-employment by contracting with a third party employer of record, such as a temp agency, consulting firm or umbrella service. The employer of record employs the worker for at least the duration of the project and makes sure that payroll taxes are paid and the worker is covered for unemployment insurance, workers compensation, liability insurance and employee benefits.

Fortunately, for the IMF, the IRS came after Geithner for back taxes, penalties and interest on the unpaid taxes, and did not go after the deeper pockets of the IMF. The tax collector could have reviewed the evidence and determined that Geithner was, in fact, a misclassified employee of the IMF. It happens all the time. The incident might also have triggered an audit of the IMF’s payments to all its contingent workers going back several years. The financial consequences to an organization of an IRS audit of worker status can be disastrous, costing thousands of dollars per misclassified employee.

Yep, both the IMF and Timothy Geithner would have been well served by using the employer-of-record service of Solo W-2, Inc.

You can read a brief overview here about Solo IC Compliance by Solo W-2, Inc., which provides the following services to companies nationwide:

• Mitigation of Co-employment Risks

• Compliance Testing and Certification of Independent Contractors

• Contractor Payment Processing

• Contingent Worker Cost Containment

James R. Ziegler, Ph.D.