Lurking tax land mines
Like Treasury nominee Geithner, workers who don't have payroll taxes automatically withheld can run into nasty surprises at tax time.
NEW YORK (CNNMoney.com) -- Those lobbying for simplification of the tax system now have a high-profile Exhibit A for their war on IRS complexity: Timothy Geithner, the Treasury Secretary nominee who has landed in hot water for failing to pay taxes he says he didn't realize he owed. It's a situation experts say is surprisingly common. For the self-employed and others with nontraditional jobs, tallying up an accurate tax bill can be a tricky task.
"While Geithner's tax problems have become an issue because he is up for appointment to a high government position, the issue applies to anyone who either works at more than one job or has a job that is not directly subject to tax withholding," said William Prugh, senior partner at law firm Shughart, Thomson and Kilroy in Kansas City.
Geithner's federal tax payments were short $34,000 between 2001 and 2004, a sum he has since paid back with interest. The trouble stemmed from his work as an official for the International Monetary Fund (IMF), a position he held before becoming the president of the Federal Reserve Bank of New York.
Because the IMF is not a domestic organization, it does not withhold payroll taxes for its American employees. Those taxes, which fund Social Security and Medicare, total around 15% of a worker's income. Like self-employed workers, the IMF's employees are expected to pay those taxes themselves directly to the IRS.
But when taxes aren't directly withheld from paychecks, errors abound. The IRS estimates that as many as half of all U.S.-based employees of foreign embassies and international organizations underestimate their tax liabilities. In 2007, in an effort to draw attention to the problem, the IRS offered such workers a one-time settlement with reduced penalties.
Like Geithner, workers with income from multiple or unusual sources can run into trouble if they don't know how they're being classified and exactly what's being withheld from their checks.
"It's a common issue, since many get income from different sources," Prugh said. "Sometimes their pay will come from being hired as a contracted employee, while other times it comes being a freelancer or an independent contractor or a self-employed worker."
For companies, figuring out who counts as an employee can also be complex.
"The status of an employee and a contractor comes up all the time. The guidance on the differences between who is and is not an employee is difficult to follow," Prugh said.
A full run-down of differences is outlined on the IRS's Web site, but the basic distinction between employees and independent contractors revolves around how work duties are carried out. An employee is anyone who performs work under the direct supervision of their employer. An independent contractor produces the work or provides a service without direction on how to accomplish it.
"Being in a business for yourself requires a range of skills. If you are a cabinet maker or an artist, this stuff isn't your focus, but it's important to take time to deal with the back-end of the business," said Susan Lee, a tax consultant who runs FreelanceTaxation.com. "The big issue is being aware of what is coming in and what is going out."
The best way to keep track of what you owe in taxes is to find out how you are being categorized and which taxes are being withheld for each job you take.
"[The person getting paid] needs to know the status in order to file taxes accordingly, but it's the responsibility of both the person hiring and the person doing the work to comply with the applicable IRS rules," Prugh said.
Once you know how you are being categorized and, subsequently, which taxes are being withheld, keeping careful records will make tax season less painful.
"Whether you use your own method of [paperwork] piles or the preferred methods of Excel or QuickBooks, you can go over each invoice, perhaps on a quarterly basis, to estimate what taxes will be," Lee said. "That way it won't be a horrifying tax hell in April when you find that you owe money that you don't have. In an overstressed world, the less time you give to this task, the more stress it will cause you in the end." 
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