Nickels campaign avoids payroll taxes

Mayoral candidate Greg Nickels' campaign has spent a lot of money on yard signs and advertising, but there is one expense he has so far avoided: payroll taxes.

Unlike his chief rivals in the Seattle mayor's race, Nickels has claimed his campaign manager and two other paid workers are consultants, rather than employees, for tax purposes. In fact, for tax purposes, the Nickels campaign has said it has no employees. As a result, Nickels has paid no payroll taxes on them.

The payroll-tax bill for Mayor Paul Schell's campaign since April has been nearly $14,000, which includes withholdings for the employee portion of the taxes, according to campaign filings. The bill for City Attorney Mark Sidran has been about $3,000, which also includes the employee portion. The employees of those campaigns perform similar roles as the people paid as consultants by Nickels' campaign.

Nickels' campaign manager, Marco Lowe, said yesterday that the campaign had been correct in paying him and the others as consultants or contractors, but that they would immediately start getting pay as employees to avoid any appearance of wrongdoing.

"We're not talking about a lot of money here, and we have been very open about it," said Lowe.

Lowe insisted he and the two other workers, Colby Underwood and Chris Gregorich, are consultants. For salaries of about $3,000 or less a month — with no health benefits — the three have handled the grunt work of the campaign, raising money, scheduling appearances and seeking endorsements for Nickels, a Democrat on the Metropolitan King County Council.

However, records show none of them has any political-consulting business registered with the state. And city records show Nickels did withhold payroll taxes when he ran for mayor in 1997.

Businesses and other employers generally must pay federal Social Security and Medicare and state unemployment taxes on their employees. However, someone who hires a consultant or other independent contractor does not pay those taxes.

Federal and state governments have rules to determine whether a worker is an employee or a contractor. While there are gray areas, the rules boil down to this: Contractors are their own bosses and employees are not.

Contractors, the rules say, typically have their own offices and equipment, can hire their own employees and often have their own offices and business licenses.

Employees are under the control of a single company or employer, don't have their own offices or equipment and are not free to work for other clients.

In addition to volunteers and regular employees, most campaigns rely to one degree or another on consultants.

Schell, for example, has been paying his longtime adviser, Blair Butterworth, $5,000 a month. Butterworth is a well-known political consultant who owns his own business, J. Blair Butterworth and Associates, which is licensed with the state.

Ironically, Butterworth was involved decades ago in the only similar tax case that officials at the state's Employment Security Department, which collects unemployment insurance, could find.

In 1977, Butterworth worked as campaign manager for longtime Seattle City Councilman Sam Smith, who was running for mayor. Butterworth was paid as a consultant, but the state argued he was an employee for tax purposes, noting that he was working entirely under the authority of the Smith campaign. The state prevailed and ordered Smith to pay taxes on Butterworth's salary, according to records provided by the department.

No complaint has been filed against the Nickels campaign over the tax issue, and a spokeswoman for the Internal Revenue Service declined to comment beyond pointing to the government's rules for distinguishing contractors from employees.

An official with the state Department of Labor and Industries (L&I), which collects state workers'-compensation taxes, said he didn't know the specifics of the Nickels campaign's situation but that employers need to make sure they don't skirt the law to save money. "We take the reporting very seriously," said Doug Connell, assistant director of insurance services for L&I.

Connell added that the duration of employment or whether it was political in nature would not make a difference in determining whether taxes are owed.

Schell called the tax issue evidence that Nickels didn't understand finances.

"It's a matter of the law, isn't it?" asked Schell, whose campaign last month was dinged by the city Ethics and Elections Commission director for allegedly getting a sweetheart deal on rent for his campaign headquarters. Schell insisted he was correct in getting a $600-a-month rental deal but agreed to double the rent to $1,200 to avoid controversy.

Ruth LaRocque, campaign manager for Sidran, said the campaign had no comment on Nickels' practices. Sidran's campaign also had some campaign-finance trouble this summer when it inadvertently accepted too much money from 22 donors. The extra money was quickly refunded.

The Sidran campaign tax bill has been significantly lower than Schell's because it started later, has a smaller budget and had fewer employees until recently, LaRocque said.

Jim Brunner can be reached at 206-515-5628 or jbrunner@seattletimes.com.