On Monday I gave you an excerpt from my book It Starts With an Idea – Tax Tips for Small Businesses; regarding entity selection, Tuesday was another excerpt discussing Employees, and Wednesday was still another excerpt with funding your business. Today my article comes from another chapter in my book. This time we discuss the Affordable Care Act.
The Affordable Care Act, affects your business in a few different ways. The first is that beginning in 2013 the Medicare Tax on wages above $200,000.00 will be increased by 0.9%. The current Medicare Rate is 1.45% on all wages. Employers are required to withhold this amount from wages, and remit the amount to the Internal Revenue Service. If you work for more than one employer through the year and you make over $200,000.00 then you will have to remit the additional 0.9% with your Federal Income Tax Return. As an employer you need to begin withholding these amounts in the first quarter of 2013. If you are self-employed (not taxed as an C-Corporation or an S-Corporation, you will need to make this adjustment with your estimated tax payments beginning with the first quarter of 2013.
With the Affordable Care Act, a few new taxes were created. One of these taxes is called the Net Investment Income Tax (NIIT). The tax is 3.8% on the lesser of a taxpayer’s income and their investment income. This will be reported on your 1040 for 2013. The other is called the Medical Device Excise Tax. This will be a tax of 2.3% on the price of medical supply sales by a manufacturer. This tax does not apply to devices purchased for resale.
The Internal Revenue Service has issued proposed regulations on IRC § 1411 net investment tax (NIIT). Because the law is new, and goes into effect January 1, 2013, the Service has issued these regulations as guidance for taxpayers. In addition, proposed regulations were issued for IRC § 1401 which is the additional hospital insurance tax.
Net Investment Tax
As I mentioned earlier, net investment income tax, is a 3.8% additional tax on certain investment income. The tax goes into effect January 1, 2013. In its guidance, the Internal Revenue Service cleared up who pays the tax, what investment income is, and what income brackets will pay the tax.
The tax applies to individuals, estates, and trusts with income above statutory threshold amounts. Individuals will be subject to the NIIT if their modified adjusted gross income (MAGI) is over the following amounts, not adjusted for inflation:
· Married Filing Joint: $250,000.00
· Married Filing Separate: $125,000.00
· Single: $200,000.00
· Head of Household: $200,000.00
· Qualifying widow(er): $250,000.00
NIIT does not apply to non-resident aliens. The tax is subject to estimated tax rules, and is reported on Form 1040.
Additional Medicare Tax
In addition to the proposed regulations on NIIT, the Internal Revenue Service has also issued proposed regulations regarding the hospital insurance tax (additional Medicare Tax).
The tax applies to individuals’ wages and compensation, as well as self-employment income above a threshold amount that is received after December 31, 2012. The tax rate is 0.9%. The additional Medicare tax will be calculated and reported on the individual’s tax return.
The thresholds for the tax are as followed:
· Married Filing Jointly: $250,000.00
· Married Filing Separately: $125,000.00
· Single: $200,000.00
· Head of Household: $200,000.00
· Qualifying Widow(er): $250,000.00
All of the wages that are currently subject to Medicare Tax will be subject to the additional tax, if they are paid in excess of the threshold amount. There are no special rules for nonresident aliens and U.S. Citizens living abroad.
Employers must withhold additional Medicare Tax for wages paid above the threshold. A taxpayer cannot request additional withholding specifically for the additional Medicare tax, but can request that their employer withhold additional income tax. Estimated tax rules apply to the additional Medicare tax, but the individual need not identify the payments as being specifically for that tax.
In 2013, a small business with 50 or fewer employees is not required to provide healthcare insurance for their employees. However if you do provide healthcare for your workers you can be eligible for a tax credit of up to 35%. Under the Small Business Health Care Tax Credit, an employer can claim a credit of up to 35% of employer-paid health insurance premiums. The Health Care Tax Credit Amounts are
· 35% of eligible premiums – for tax years 2010 through 2013
· 50% of eligible premiums – beginning in 2014
There is a three-part test to see if a small business qualifies for the health care credit:
1. The business must have less than 25 full-time equivalent employees
2. The average wage of the employees must be less than $50,000.00 per full-time equivalent employees
3. Health insurance premiums must be paid through a qualifying arrangement
There are three limitations that reduce the Health Care Tax Credit:
1. The number of full-time equivalent employees exceeds ten
2. Average annual wages exceed $25,000.00 per full-time equivalent or
3. Actual health insurance premiums exceed average premiums paid for health coverage in the employer’s area
Starting in 2014, businesses that have 50 or more workers that don’t provide health care coverage and have at least one full-time worker who receives subsidized coverage in the health insurance exchange will have to pay a fee of up to $2,000.00 per full-time employees. The firm’s first 30 workers would be excluded from the fee.
This is how the Affordable Care Act affects your business.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle, The Complete Guide to Retirement Plans for Small Businesses available on Nook and Kindle, The Complete Guide to Estate, Gift and Trust Taxation, available on Nook and Kindle, The Complete Guide to Hiring an Accountant, available on Nook and Kindle, and The Complete Guide to Subchapter S-Corporations, available on Nook and Kindle.