It’s every hardworking American’s dream: a tax-free income. And for one small portion of the population, it’s a dream come true. American employees of the United Nations and its affiliate organizations, the World Bank and International Monetary Fund, enjoy a system that lets them keep most all of their income, free from the deductions typically imposed by Uncle Sam.
No fair, right? Well, the rule actually exists as a result of an attempt to even the playing field among UN employees, not skew it. Most countries do not require their citizens to pay taxes if they work for the UN, and up until 1947, the U.S. was included in this group. But that year, Congress passed a resolution preventing the UN from creating what it saw as “a group of nationals not subject to the normal responsibilities of citizenship.”
To compensate, the UN developed a procedure in which it reimburses the income taxes of its U.S. citizen employees. These employees are still ultimately responsible for half of their Social Security and Medicare taxes (a maximum of 7.65 percent), but everything else is taken care of, including state and local income taxes. “The purpose of the reimbursement system is to place UN staff members subject to taxation in the position they would have been if their official emoluments were not taxed. Hence, it is intended neither to provide a benefit, nor to place the staff member at a disadvantage,” explains the UN’s Department of Management website.
This historical quirk in the tax system came into the spotlight early last year, during confirmation hearings for now-Treasury secretary Timothy Geithner. His formidable qualifications were obscured by a more pedestrian predicament — Geithner blundered on his tax returns. While working for the IMF from 2001 to 2003, he filed — some would say laughably — using the popular tax software Turbotax, and in the process failed to account for all of the money he owed to his future employer (his portion of the Social Security and Medicare taxes; some $34,000). Geithner got a pass, and was ultimately confirmed, but his gaff highlighted the confusion surrounding the tax obligations of UN, World Bank and IMF employees.
A 30-page memo circulated by the UN Secretariat’s controller for the 2009 tax year attempts to clear it all up, but even armed with this, it seems best to leave it to the experts.
“I do think the average UN employee would have difficulty filing his or her taxes without the help of an accountant,” said J.J. O’Connor, a New York accountant and president of Green Oak Financial. In addition to being responsible for ensuring that the UN does indeed make the correct payments to the IRS, employees must file self-employment forms, even though they are full-time employees, and they must pay full taxes out of their own pocket for any income not derived from UN sources. They also pay the full amount of Medicare and Social Security taxes, half of which are then reimbursed by the UN. “All these intermingling items present a level of complexity that the ordinary UN employee might have difficulty with,” said O’Connor. And yes, that apparently includes future Treasury secretaries.
It used to be even more confusing. Until 1971, the tax reimbursement was reported as income on the following year’s tax returns. “The change since 1971 reduces the tax pyramiding effect on staff members’ income and eliminates the time lag,” says Ari Gaitanis, a spokesperson for the UN.
The American government doesn’t suffer because of this loophole. In fact, it brings in money where it would otherwise lose out. It doesn’t collect taxes from the more than 4,800 foreign UN employees in New York and DC – the International Organizations Immunities Act, enacted in 1945, ensures this. But the nearly 1,800 American employees at the UN are not covered by this law. Where they are concerned, America rakes it in at the UN’s expense (although, 22 percent of the UN budget comes from the U.S., so some of this money is stuck in a revolving door). Salaries at the UN range from $47,968 to $201,351. If every employee made only the minimum and was taxed 25 percent (the federal rate for a single or head of household) on his or her income, the U.S. government would bring in over $21.5 million. Add the thousands of IMF and World Bank American staff members to the equation, as well as those with higher salaries, and the real number is in the many tens of millions of dollars every year, all covered by the employees’ respective organizations.
In the realm of job perks, this one’s hard to beat.
