Can someone else pay your taxes?

Answers to your questions about the news.
Jan. 23 2006 6:30 PM

Can Someone Else Pay Your Taxes?

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

Download the MP3 audio version of this story here. The Explainer now has its own free daily podcast; click here to learn more.

Hatch isn't feeling like such a winner now 
Click image to expand.
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.

Advertisement

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.

TODAY IN SLATE

Politics

Smash and Grab

Will competitive Senate contests in Kansas and South Dakota lead to more late-breaking races in future elections?

Even When They Go to College, the Poor Sometimes Stay Poor

Here’s Just How Far a Southern Woman May Have to Drive to Get an Abortion

The Most Ingenious Teaching Device Ever Invented

Marvel’s Civil War Is a Far-Right Paranoid Fantasy

It’s also a mess. Can the movies do better?

Behold

Sprawl, Decadence, and Environmental Ruin in Nevada

Space: The Next Generation

An All-Female Mission to Mars

As a NASA guinea pig, I verified that women would be cheaper to launch than men.

Watching Netflix in Bed. Hanging Bananas. Is There Anything These Hooks Can’t Solve?

The Procedural Rule That Could Prevent Gay Marriage From Reaching SCOTUS Again

  News & Politics
Foreigners
Oct. 20 2014 6:49 PM God’s Oligarch One of Vladimir Putin’s favorite businessmen wants to start an Orthodox Christian Fox News and return Russia to its glorious czarist past.
  Business
Moneybox
Oct. 20 2014 6:48 PM Apple: Still Enormously Profitable
  Life
Outward
Oct. 20 2014 3:16 PM The Catholic Church Is Changing, and Celibate Gays Are Leading the Way
  Double X
The XX Factor
Oct. 20 2014 6:17 PM I Am 25. I Don't Work at Facebook. My Doctors Want Me to Freeze My Eggs.
  Slate Plus
Tv Club
Oct. 20 2014 7:15 AM The Slate Doctor Who Podcast: Episode 9 A spoiler-filled discussion of "Flatline."
  Arts
Brow Beat
Oct. 20 2014 6:32 PM Taylor Swift’s Pro-Gay “Welcome to New York” Takes Her Further Than Ever From Nashville 
  Technology
Future Tense
Oct. 20 2014 4:59 PM Canadian Town Cancels Outdoor Halloween Because Polar Bears
  Health & Science
Medical Examiner
Oct. 20 2014 11:46 AM Is Anybody Watching My Do-Gooding? The difference between being a hero and being an altruist.
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.