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Fort Worth Business Press

08.11.2010

 Health care reform will affect small business tax credits

Jon Chester, MST, CPA - President

The recent health care reform legislation included a new health care tax credit for certain small businesses that provide health insurance to their employees.

The credit is available to small companies and tax-exempt organizations for the years of 2010 – 2013. So, for those companies with 25 or fewer full-time employees with an average wage of $50,000 or less, and the company pays a minimum of 50 percent of their employees coverage are eligible. The credit is phased out based on size and salaries of the company. Companies with 10 or fewer employees with an average wage of $25,000 will receive the highest credit of 35 percent of premiums paid. This credit increases to 50 percent in 2014.

Note: The credit is claimed on the business tax return NOT the employment tax returns.

If an owner of a business also provides services to it, the owner does count as an employee.

A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of full time employees or the amount of average annual wages; so the premiums paid on their behalf are not counted in determining the amount of the credit. It is strongly advised you speak with your accountant to determine which is the best route for your company.

Indoor Tanning Businesses will have a new tax of 10 percent imposed as of July 1 2010.

A list of changes by year:

2011

Penalties for using Flexible Spending Accounts incorrectly will increase from 10 percent to 20 percent.

Earned Income Medicare tax will increase from 1.45 percent to 2.35 percent in 2013 on individuals earning over $200,000 or couples over $250,000.

A plan to provide a vehicle for small businesses to offer tax-free benefits will be created. This would ease the small employer's administrative burden of sponsoring a cafeteria plan.

2013

Contributions to flexible savings accounts will be limited to $2,500 per year, indexed by the Consumer Price Index in subsequent years.

A new unearned (Passive) Income Medicare tax of 3.8 percent for individuals earning over $200,000 or couples over $250,000 will be imposed.

Income Threshold deduction for unreimbursed medical expenses will increase from 7.5 percent to 10 percent for those under 65. This means that only when your medical bills are greater than 10 percent of your adjusted gross income, you will be able to deduct them from your taxable income. Those individuals older than 65 can still claim the 7.5 percent deduction through 2016. This can make quite a difference in the amount of after tax income you need to pay out on medical expenses.

The hospital insurance tax will increase 0.9 percentage points for those earning more than $200,000 ($250,000 for married filing jointly), and it includes net investment income.

A 2.9 percent excise tax on the first sale of medical devices will be established. Exceptions are eyeglasses, contact lenses, hearing aids or other items for individual use.

Primary care doctors would get a Medicaid payment boost in the reconciliation bill. Beginning in 2013 and 2014, the doctors' payment rates would be on par with Medicare rates, which typically are about 20 percent higher than Medicaid.

2014

Companies with 50 or more employees must offer coverage to employees or pay a $2,000 penalty per employee.

Americans without insurance would face an annual penalty, starting in 2014 at $95 and increasing in later years. Those without insurance in 2016, for example, would pay the greater of two alternatives: a flat fee of $695, or 2.5 percent of their adjusted gross income.

States will be required to open Small Business Health Options programs allowing a pool to reduce premium costs to be on par with large businesses.

2018

The “Maserati” tax: The levy on high-cost insurance plans is scaled back and delayed, rendering it more a "Maserati" than a "Cadillac" tax. It would apply only to the portion of plans costing more than $10,200 a year for individuals, up from $8,500, and $27,500 for families, up from $23,000.

This article is intended for informational purposes only. Please do not take this as tax advice as each circumstance is different. For specific tax advice, please contact your CPA or contact:

Sterling's Bookkeeping & Tax Service
214.330.4682
email us

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