As a small business owner (S-corp), I used to pay my health insurance out of my own pocket, and then deduct the cost of that insurance on the first page of my 1040. Starting in 2011, my accountant told me to take the expense in the corporation, show it as income on the W-2….and then deduct it on my 1040.
This was fine by me, because you should be using “pre-tax money” to pay for health insurance…..just as larger companies do for their employees. My test is always this: will a person receive worse tax treatment if they leave employment and start their own company? The answer should always be “no”.
Still naive at age 50, I did not think that this change in 2011 was related to Obamacare passing in 2010. I was not expecting another shoe to drop….but it just did.
Effective 1/1/2015, I have to pay Social Security & Medicare tax on my health insurance premiums. That is going to cost me over $1,600 more per year in taxes. First, they force me to pay the premiums from inside my corporation, then they hit me with a 14.2% tax me on them.
Think about it: I now have to pay 14.2% in tax (employee and employer portion both) on insurance that I am required by law to purchase !?!
My immediate question was: do regular employees have to pay Social Security and Medicare tax on their health insurance benefits? Of course not. Government employees? Of course not. Only owners of small businesses.
ZeroCare (because that is what it is) sends a clear message to potential entrepreneurs: don’t even think about starting your own company. Stay in the “safe nest” of your employers. And to current entrepreneurs, it says “drop dead – we can screw you, so we will”. If they tried that with all employees, there would be blood.
If you know that all the data shows that small businesses are the job creators (not medium or large businesses), then you would also know that the above described action will have consequences for job creation. It’ just one more straw on the camel’s back.
Here is an additional way this change screws small business: if my 1040 income is too low, the health insurance deduction has no value to me. It is simply lost. All other employees simply receive their health insurance benefit tax free, and there is no grossing up of income or deduction to take.
So in other words: if your business is not doing well, and you as the owner are working for no pay to save it….then you just got a tax hike.
“Hope and change”? More like rope and chains.