Can someone else pay your taxes?

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Jan. 23 2006 6:30 PM

Can Someone Else Pay Your Taxes?

Sure, but only if you pay taxes on the taxes.

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Hatch isn't feeling like such a winner now 
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Hatch isn't feeling like such a winner now

Survivor winner and criminal defendant Richard Hatch says the show's producers are to blame for his failure to pay taxes on the million-dollar prize. His lawyer claimed on Friday that the producers promised to cover Hatch's tax liability if he kept quiet about cheating among the contestants. Can someone else really pay your taxes?

Daniel Engber Daniel Engber

Daniel Engber is a columnist for Slate

Yes. It's not uncommon for corporations to pay taxes on behalf of their high-level executives. If the Survivor staff wanted to cover Hatch's taxes, they could have added the cost of the taxes to his million-dollar prize, or reimbursed him the money after tax day.

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Having someone else pay your taxes can get tricky, since the government counts the amount that person pays as taxable income. (A 1929 Supreme Court ruling clarified this point.) Consider the Survivor example: If Hatch owed federal income tax at a 35 percent rate, he'd have to pay $350,000. To cover that amount upfront, the producers would give him $1,350,000 instead of $1,000,000. But the income tax on $1,350,000 would be $472,500—or another $122,500 on top of what he owed before.

It doesn't end there. If the producers then paid off the $122,500, he'd be liable for that money as well—to the tune of $42,875. In covering that, the producers would boost his liability by another $15,000. And so on, ad infinitum. It is possible to determine the sum of this infinite series of computations; the formula, in fact, is remarkably simple. If Hatch were being taxed at 35 percent, CBS would have laid out $1,538,461 to cover it. (Graduated tax rates can make this accounting somewhat more complicated in practice.)

We don't know if the producers really did offer to pay Hatch's taxes, but other shows have made similar concessions. In 2004, Oprah Winfrey landed in some hot water after giving audience members "free" cars. (Check the TaxProf Blog for extensive coverage; here's a Daily Show report on the dire consequences of her giveaway.) When she arranged a similar giveaway in 2005, she added a cash supplement to cover the taxes. Instead of computing the exact liability for each audience member—which would depend on his or her overall earnings—Oprah seems to have assumed an average tax rate of around 15 percent. (Other shows have followed her lead.)

In April, she had a better idea. According to reports, Oprah handed out $5,000 checks to employees from a personal account, so the money could be treated as a gift—which is tax-free up to a certain limit—as opposed to a salary or prize. This wouldn't have worked for Hatch, since something can only count as a gift if it's handed over with "detached and disinterested generosity." (Hush money hardly meets those criteria.)

Bonus Explainer: The tax code has an exception to these rules in the case of household employees. If you want to pay your housekeeper's Social Security taxes instead of withholding them, you don't have to do the full calculation described above.

Got a question about today's news? Ask the Explainer.

Explainer thanks Paul Caron of the University of Cincinnati, Anthony Infanti of the University of Pittsburgh, Michael Kirsch of Notre Dame, and Donald Tobin of Ohio State University.

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