Independent Contractor Compliance Blog - by Collabrus™

The two thousand plus page Health Care and Reconciliation Bills are complex and rich with provisions that will take time to be fully discovered. In this article I’ll explore some of the new taxes, fines and penalty provisions that affect employers and their workers. Many of the provisions do not take effect immediately, but are phased in during the next decade.

Effective for the tax year 2013 there will be higher taxes for households with income above $250,000 and individuals above $200,000:

• Medicare payroll tax on earnings above those amounts will rise from 1.45 percent to 2.35 percent (employer withholding from employee’s wages required).
• Unearned income above those amounts, such as dividends, will be subject to a 3.8 percent tax (paid on personal income tax returns).

Also in 2013, maximum contributions to pre-tax Flexible Savings Account contributions will be limited to $2,500 a year (down from the current $3,050 for individuals). This will be another change for employers with these programs.

Effective for the tax year 2014 most people will be required to buy insurance coverage or pay penalties. The penalties start at $95 in 2014 and rise to $695 or 2.5 percent of income (whichever is greater) in 2016. I believe the mechanics of how this penalty will be collected have yet to be designed. However, this requirement will affect employers if their employees meet this requirement by obtaining their insurance from an exchange (keep reading for more details on this).

Also effective in 2014 if an employer has 51 or more full-time employees and does not offer coverage but at least one full-time employee gets an exchange credit, the employer is penalized $2,000 per employee. (The first 30 workers are exempted from the payment calculation).

For example:  For an employer with 100 workers the penalty will be (100 minus 30) or, 70 x $2,000 = $140,000.

If an employer has 51 or more full-time employees and offers coverage, but at least one full-time employee gets an exchange credit, the employer is penalized the lesser of $2,000 per employee (no 30-worker exemption) or $3,000 per credit receiving employee.

For example: If an employer with 75 workers offers insurance but 10 workers receive exchange credits, the firm would pay the lesser of either 75 x $2,000 = $150,000, or 10 x $3,000 = $30,000. In this case the employer would pay $30,000.

Effective for the tax year 2018 there will be a 40% tax on the premiums of high-end employer plans costing $10,200 for an individual plan or $27,500 for a family plan. This has been referred to as the “Excise Tax on Cadillac Plans.”

The thresholds will be set higher for retirees who are at least age 55 but not yet eligible for Medicare and for employees in certain high-risk professions, such as firefighting, law enforcement, construction, agriculture, and mining.

The tax would be levied on a non-deductible basis against the insurance companies or insurance administrators. However most agree the cost will, in some way, be passed along to employers or to their covered employees.

Who enforces the provisions of the Health Care Bill?

The IRS; for example:

• The IRS will be responsible to verify if companies have a qualifying plan.
• The IRS will be responsible for assessing and collecting all taxes, fines and penalties.
• The penalties for not purchasing Health Care Insurance will be included in the individual and business tax returns, as appropriate.
• Tax credits will be administered through business and individual tax returns.

Beware! This scrutiny could easily lead to increased IRS enforcement in other areas.

It is expected the IRS will receive increased funding to hire additional auditors, agents and other staff to administer this program. The exact number is not known at this time. Be forewarned: In my experience once an agency (like the IRS) begins looking at your business it doesn’t restrict itself to just the initial issue. One thing can lead to another and soon you may very well find yourself in the middle of an employment tax audit.

These provisions are complex and apply to both your regular, full-time employees and to your part-time and contingent workers.

With the passage of this new law it is becoming too costly to take risks and come out on the wrong side. It may be time to explore alternatives for your contingent workforce and time to make sure you are in compliance. Collabrus can help!