New information surfaced Friday that suggests that Donald Trump may not only have used aggressive tax planning to reduce his income tax bill to zero, he may also have avoided paying any Social Security and Medicare payroll tax on a substantial amount of his income. If so, he’d be at least the third well-known politician to rely on a gimmick to avoid payroll taxes on consulting income.
S&P Global Market Intelligence reported that Trump received $583,000 of salary and $4.83 million of “other compensation” from his hotels and casinos in 1995, which was reflected in a 10-K filing for Trump Hotels & Casino Resorts Holdings LP. Last Sunday, The New York Times published the front page of Mr. Trump’s 1995 New York State tax return, which showed that he reported only $6,471 of wages that year. How can these figures be reconciled?
Trump might simply have misclassified some or all of the $5.41 million, perhaps because his various enterprises sent him 1099-MISC tax forms for consulting fees rather than W-2s for wages. But in its SEC filings, Trump Hotels & Casino Resorts described the $583,000 as salary, which is hard to treat as consulting fees on a tax return. While payments to directors generally are treated as consulting fees, Trump Hotels & Casino Resorts did not pay any director fees to employees or consultants (it did pay director fees of $50,000 annually plus $2,000 per meeting to non-employees.)
But there is another possible explanation. Trump Hotels & Casino Resorts may have paid the $5.41 million to Trump Plaza Management Corp., a corporation beneficially owned by Trump, and most likely an S corporation. If so, Trump Plaza Management would in turn pay salary or distribute its profits to Trump. The company would have to withhold payroll taxes on any of Trump’s income treated as salary, but not on profits distributed to him.
To avoid abuse, management companies are supposed to treat a reasonable portion of such compensation as salary and send their owners W-2s. However, the companies often ignore this requirement and distribute most of their owners’ compensation as profits to avoid payroll taxes on a large chunk of income. This technique became notorious after being used by two well-known politicians—former Democratic presidential hopeful John Edwards and former Republican Speaker of the House (and presidential hopeful) Newt Gingrich. Thus, it became known as the Gingrich-Edwards loophole.
If Trump had used this gambit in 1995, he could have saved about $164,000 in payroll taxes. (He otherwise would have paid about $7,600 of Social Security taxes [12.4% * $61,200, the maximum base in 1995] plus $157,000 of Medicare taxes [2.9% * $5.41 million, with no cap on the tax].) Had Trump continued to receive compensation this way, he could have avoided payroll taxes on it for years.
Of course, we will not know for sure unless Trump releases his tax returns.
This article first appeared in TaxVox.