Small Business Tax Impact of Health Care Reform
from Barbara Weltman, American Express Open Forum, April 2010:
As a small business owner, the recently enacted Patient Protection and Affordable Care Act and its companion, the Health Care and Education Reconciliation Act, will dramatically change your tax landscape over the next several years. While one of the avowed purposes of health care reform is to bring down the cost of coverage, small business owners are likely to see premium increases, at least for the foreseeable future, and certainly will experience overall higher tax costs. Here are some of the key provisions from health care reform in chronological order.
While the law does not require that small businesses pay for employee health coverage, if you choose to do so and pay at least half the cost, you may qualify for a tax credit. The tax credit is very complicated and comes in two phases:
- For 2010 through 2013: a credit of up to 35 percent of your premiums costs if you have fewer than 25 employees. The credit depends on the average compensation to workers, with the top credit for firms paying their workers on average $25,000 or less. This credit applies to coverage purchased from an insurer and you can claim it in each of the four years in which you qualify.
- Starting in 2014: a credit of up to 50 percent for coverage purchased through an exchange that will be set up by the states (states are instructed to create Small Business Health Care Options Program, or SHOP, exchanges). This phase of the credit can be claimed for only two years.
Also tanning salons will have to collect a 10 percent excise tax on their services starting July 1, 2010. While patrons pay the tax, if the owners fail to collect it, they’ll owe the tax.
You’ll have to report on employees’ W-2 forms the value of health care benefits received.
If you want to offer fringe benefits, including health coverage, to employees under a type of benefit plan called a “cafeteria plan,” you can do so using a new “simple cafeteria plan” for small businesses (100 or fewer employees). You’ll avoid the complicated rules for determining nondiscrimination that usually applies to cafeteria plans, but you’ll have to make certain minimum contributions to the plan to ensure that the plan is viewed as nondiscriminatory.
You’ll have to issue Form 1099 to any business that provides services to you of $600 or more. Until this time, such requirement applied only to the services of an independent contractor. For example, with the law change, 1099s will have to be issued to corporations that do work for you.
If you’re considered to be a high-income taxpayer, you could owe more in Medicare taxes. Starting in 2013, the Medicare tax is increased by:
- 0.9% for earned income in excess of $200,000 for singles, $250,000 for joint filers, and $125,000 for married persons filing separate returns.
- 3.8% on investment income for taxpayers with adjusted gross income (AGI) over $200,000 for singles, $250,000 for joint filers, and $125,000 for married persons filing separate returns. More specifically, the 3.8% tax applies to the lesser of net investment income (from such sources as dividends, interest, and annuities) or AGI over the dollar limit for your filing status.
If you offer flexible spending arrangements (FSAs), you’ll have to amend the plan to limit employee salary reduction contributions to their accounts to $2,500 (currently you can set any limit you want). The $2,500 limit will be adjusted annually for inflation after 2013.
This is the year in which just about everyone in the U.S. must carry health coverage or pay a penalty (there is no penalty on those who cannot afford to pay for coverage; their coverage will be subsidized). Individuals will be able to buy coverage from private insurers or state-sponsored exchanges.
Larger employers — those with 50 or more employees — must provide affordable essential health coverage for their staff or pay a penalty (“play or pay”); smaller employers are exempt from this mandate.
Small business owners that have top-of-the-line health coverage will probably pay more for it. The reason: A 40 percent excise tax will be imposed on insurers or plan administrators with so-called “Cadillac” plans and the cost will surely be passed on to consumers.
This has been just a survey of the key changes affecting small businesses. It is vital for entrepreneurs to stay alert to clarifications and amendments affecting health-related tax provisions that are sure to come. Now is the time to discuss the impact of the new law with your tax advisor so you can plan ahead.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. and trusted professional advocate for small businesses and entrepreneurs. She publishes Big Ideas for Small Business® at www.barbaraweltman.com Follow her on Twitter @BarbaraWeltman.