Small business owners all over the country were breathing a sigh of relief on Feb. 10, when the Obama administration delayed the Affordable Care Act’s employer mandate for businesses with 50 to 99 full-time employees. Those companies now have until 2016 to provide health coverage. But regardless of how many employees you have and whether or not you cover them now or in the future, there’s one aspect of health reform that you will have to face imminently: its tax implications.
The Affordable Care Act, otherwise known as Obamacare, is ushering in tax changes that will affect businesses and individuals alike. Some of these changes will pop up on your 2013 return, while others will phase in over the next couple of years. And despite the rocky rollout that has made enrolling in plans through the federal and state exchanges a hassle, the taxes put in place to both fund the program and incentivize people to use it are still largely intact.
First a quick look at what’s not changing: the small-business tax credit. If you have fewer than 25 employees and you provided a health plan to them in 2013, you may be eligible for a business tax credit of up to 35 percent this year. That credit will increase to 50 percent in the 2014 tax year, provided the average annual wages you pay are under $50,000 and you purchased the plan on the federal or state-run small business exchanges. (Businesses in some states where no insurers elected to offer small-business plans on the exchanges may still be eligible for credits if they buy on the private market—check with your broker or tax advisor for the latest developments.)
Still, there are some important requirements of that tax credit that small-business owners need to keep in mind, says Bradford Hall, managing director of Hall & Company, CPAs, an accounting firm in Irvine, Calif. “Your company has to provide at least 50 percent of the coverage of the cost of the insurance for each employee to qualify,” Hall says. Furthermore, you have to do some complex math to figure out if the amount of the credit is going to be worth the hassle of applying for it, he says. “The maximum credit only applies if you have no more than 10 full-time employees earning $25,000 or less. Even if you do qualify for something, you have to ask yourself, ‘Is it worth it?’”
For larger employers, the delay of the employer mandate provides extra time to figure out the most cost-effective and tax-effective strategy for offering health insurance. Companies can elect not to offer insurance, but they’ll have to pay fees to the IRS of at least $2,000 per employee, now starting in 2015 for companies with more than 100 full-timers and 2016 for those with more than 50. Ron Present, a principal at the accounting firm Brown Smith Wallace in St. Louis, says that when his clients were under the gun to figure out their benefits strategy, many of them assumed it would be more affordable to just pay the IRS fines. Now, with the extra time, they’re able to explore alternatives.
One popular alternative, Present says, is to cover employees but not their spouses. Another is to offer the most bare-bones plan you can find that’s compliant with Obamacare. “The cost typically for any employer of offering insurance is still going to be more than $2,000 per person, but strategically it might be the best option” in terms of attracting and retaining talent, Present says. He adds that it’s important to remember that your contributions to your company’s health plan will be tax deductible, whereas the fines for not offering insurance won’t be.
Another option that has become popular of late is self-insurance—paying the healthcare costs of your employees directly rather than handing it off to a managed-care company. But there are tax implications to self-insuring that you should be aware of, says Carolyn Linkov, a principal in the New York City office of accounting firm ParenteBeard. Companies that self-insure will pay an IRS fee of $1 per covered person (employee and dependents) for 2013 plans and $2 for all self-insured plans instituted after that.
“It’s because part of the [Affordable Care Act] is designed to help fund research,” Linkov explains. The self-insurance fees are specifically designated for the Patient-Centered Outcomes Research Institute that was set up under Obamacare.
Finally, Obamacare is introducing changes to the Medicare tax starting in 2013 that will likely affect many business owners. First, the existing Medicare tax will increase from 1.45 percent to 2.35 percent for single filers with over $200,000 in income and joint filers with incomes of $250,000 or more. Some of those high earners will also get hit with a new Medicare tax of 3.8 percent on so-called “unearned income,” which includes dividends, capital gains, and collected rent.
Many people will be surprised by the burden imposed by the new Medicare taxes, Hall predicts. “We have a client with rental income who all of a sudden is going to be subjected to $80,000 of additional tax they didn’t have in 2012,” Hall says. “I think this is going to catch a lot of taxpayers blind.”