Health Care Reform and Your 2018 Tax Strategy

Roe CPA writes: At first it may sound strange to think about Health Care Reform and building a tax strategy between now and 2018. Health Care Reform is a game changer for everybody and it will take several years before it is fully implemented.  The transition will be incremental and many businesses will not always be aware of newpayroll taxes that will appear as a result of the new legislation over the next several years.  

For example, many business owners may not notice it until this time next year but Medicare taxes have increased from 2.9% to 3.8% for high-income individuals.  The Health Care Reform debate is over and now business owners are faced with how they will prepare for tax increases as they work to maintain compliance with the new legislation.   The legislation has serious tax implications for business of all size and by taking the time to properly plan a tax strategy that is right for your business it will help you grow despite an increase in your taxes.

What to Expect in 2013

Not only will Medicare taxes rise by 0.9% in 2013, but they will also be expanded to cover both wage income and investment income for individuals with higher incomes. This additional tax is called The Unearned Income Medicare Contribution Tax and was enacted as part of the Health Care Reform laws.

Medicare taxes are imposed at a flat rate of 3.8% on wages, salaries, and business or farming income earned by self-employed individuals. Unlike Social Security taxes, there is No Limit on the amount of wages subject to Medicare taxes.

Self-Employed Individuals: What You Need to Know...

The Medicare hospital insurance tax (3.8%) is paid half by employees through payroll deductions and half by the employer. But if you’re self-employed you are, of course, the employee and the employer.

So do you have to pay the 3.8% tax yourself?  No!

If you’re self-employed you are eligible to deduct half of the total Medicare tax as an adjustment to income.

Self-employed individuals calculate and pay their Medicare tax when filing their personal tax returns as part of the self-employment tax.  For those of you that fall into this category you may not see this until this time next year when you file your 2013 taxes.

Employers : What You Need To Know . . .

Employers are required to withhold an additional 0.9% on employee's wages in excess of the threshold amounts. This additional 0.9% rate is the difference between the 3.8% unearned income Medicare contribution tax rate and the 2.9% regular Medicare hospital insurance tax rate. However, the unearned income Medicare contribution tax rate is a tax imposed on individuals, and so no deduction is eligible for employers or self-employed persons for this additional Medicare tax. Also, employers might not know if an employee is subject to this additional Medicare tax. The additional Medicare tax will be calculated on an individual's personal income tax return, and any shortfall not covered by withholding will have to be paid by the individual.

Employers, however, are subject to penalties and interest for not withholding the additional Medicare tax.

Conclusion

Regardless of whether you are a sole proprietor or responsible for a 250 person company, you need to look several years over the horizon and prepare your business how to best handle the new tax realities as a result of Health Care Reform.  How you prepare for these new taxes will have a direct impact on not only your personal income but also your ability to grow or maintain your workforce to meet customer demand over the next 5 years.