NASE News

2011 Tax Changes For The Self-Employed

NASE — Monday, 9 January, 2012 10:28:13 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: NASEtweets

NASE Offers Self-Employed Tips For Getting A Jump On The Filing Season

Washington, D.C. – 2011 ended with a nice upward move on Wall Street and an increased focus on the 2012 election year, but without a clear understanding of small business taxation. The self-employed health insurance deduction for Self Employment Tax was eliminated and the Payroll Tax cut was extended only for two months. Will the tax cut be extended yet again or will it be allowed to expire? The debate continues and unfortunately the small-business owner is often the last to know. The National Association for the Self-Employed (NASE) is committed to advocating for the small-business owner in Washington, D.C. and committed to providing quick answers from the debate, once those answers are known. It has never been more important to utilize available resources, such as the NASE, for small-business owners in order to maintain compliance.

“Perhaps more than at any time I can remember, this is a time of uncertainty for the small-business owner,” said Keith Hall, National Tax Advisor for the NASE. “With a Presidential election looming, the tax code will become an increasingly powerful chip in the debate for the White House. Job credits, payroll tax cuts, investment incentives, all will be debated and re-debated. The only certainty is that things will change and it is critical that the small-business owner keep track of all the things the IRS will be asking them to do.”

Prior to preparing 2011 tax forms, the self-employed and micro-businesses (fewer than 10 employees) should be aware of a number of tax law changes, but also must stay focused and connected for new changes that are inevitable during 2012.

The following tax law changes relate to 2011 returns:

Self-Employed Health Insurance Deduction – Unfortunately, the payments that small-business owners make for health insurance premiums for themselves and their families won’t be as tax beneficial for 2011 tax returns as they were for 2010. The premiums paid for health insurance by the small-business owner will be still be deductible on page one of form 1040, but unlike 2010, those same premiums will not be included on Schedule SE, Self Employment Tax. That means net earnings from self employment will be higher and the related Self Employment Tax will be higher. This is in effect a 13.3% tax hike on the small-business owner. The NASE is committed to eliminating this inequity and restoring this deduction. Check out NASE.org for more updates from time to time.
Payroll Tax Cut for 2011 – Beginning January 1, 2011, the employee’s part of the OASDI portion of Social Security tax was decreased from 6.2% to 4.2%, on the first $106,800 paid to each employee. For the small-business owner, the OASDI portion of Self Employment Tax was decreased from 12.4% to 10.4% which was a significant benefit. The impact for the small-business owner will be included on Schedule SE and means up $2,000 in lower taxes for all working Americans.
Payroll Tax Cut for 2012 – The payroll tax cut for 2011 was expected to last only for one year, however, the cut has been extended for the first two months of 2012. The debate in Washington continues to be heavy on this subject and there is a good chance the tax cut could be extended even further. Small-business owners will need to keep track of these changes since either an extension or expiration will still require additional paper work and diligence to remain in compliance. Bookmark NASE.org to stay up to date on progress related to this important tax issue.
Reporting of Employer Provided Health Care – The Affordable Cart Act which was passed in 2010 required that employers begin reporting the cost of coverage under an employer-sponsored group health plan. That reporting was originally required beginning on January 1, 2011 so that business owners would have to report those amounts for the year just ended. The good news is that more time has been granted. The reporting for 2011 is now voluntary for all employers and optional for 2012 for those employers with less than 250 employees. Go to NASE.org and check out Notice 2012-9, issued Jan. 3, 2012 for more detail.
Increase in Maximum Section 179 Deduction – The Small Business Jobs Act of 2010 increased the maximum allowable deduction under Code Section 179 from $250,000 to $500,000 for tax years beginning in 2010 and in 2011. This provision provides additional incentive for small businesses who invest in new equipment for both years. At the same time, the limit for the phase out of the deduction was increased to $2,000,000 from $800,000.
Standard Mileage Rates Adjusted for 2011 – Business owners using their vehicle for company business can deduct 51 cents per mile driven on their 2011 tax return. The rate has also been set for 2012 at 55.5 cents per mile. The rate for medical miles driven was 19 cents per mile for 2011 and 23 cents per mile for 2012, while charitable miles use the rate of 14 cents per mile for both years.
Contribution Limits for IRAs and Other Retirement Plans - Where an IRA contributor who is not covered by a workplace retirement plan is married to someone who is covered, the deduction is phased out if the couple’s income is between $169,000 and $179,000.
AMT Exemption Increased for 2011 – For tax year 2011, the Alternative Minimum Tax exemption for a married couple filing a joint return is $74,450, and $48,450 for single filers, representing a $2,000 and $1,000 increase, respectively. The AMT exemptions are currently schedule to decrease to year 2000 levels to $45,000 for a married couple and only $33,750 for a single taxpayer. The NASE is working diligently to keep the exemption levels from decreasing for 2012. Go to NASE.org to keep track of this important process.

In preparation for the filing deadline, self-employed business owners can turn to Hall and other qualified CPAs for help through NASE’s TaxTalk program here. While there, they can submit a tax question and browse the TaxTalk resource library. 2012 is guaranteed to be a year of uncertainly and it is critical to maintain contact with up-to-date resources to help keep track of the many changes that are on the horizon.

Individuals who are unable to pay the tax that they owe with the return still have some options. It is important that the return still be filed on time even if the full amount due cannot be paid. Consider including IRS form 9465, Installment Agreement Request, which will provide additional time to meet the tax obligation. Contacting the IRS at 1-800-829-1040 as soon as possible if additional tax payment difficulties arise is the best advice.

Find out more information about these and other tax law changes for the 2010 tax season at www.IRS.gov.

About the NASE
The National Association for the Self-Employed (NASE) is the nation's leading resource for the self-employed and micro-businesses, bringing a broad range of benefits to help entrepreneurs succeed and to drive the continued growth of this vital segment of the American economy. The NASE is a 501(c) (6) nonprofit organization and provides big-business advantages to hundreds of thousands of micro-businesses across the United States. For more information, visit the association's website at NASE.org.

Tax Time: Deducting The Business Use Of Your Automobile

NASE — Wednesday, 2 March, 2011 12:57:27 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander, NASEtweets

Small Biz Owners Often Overlook This Important Deduction
Washington, D.C., March 2, 2011 – Business expenses come with the territory when you are an entrepreneur. Some expenses, however, can be easy to miss come tax time because they do not show up in your business checkbook. Use of your car for driving to client meetings, the office supply store, the post office and more are deductible expenses because you are using your vehicle for business purposes.

Here are a few tips from the National Association for the Self-Employed (NASE) to remember in regard to deducting expenses for business use of your automobile:

Standard Mileage Rate (50 cents per business mile driven in 2010, 51 cents for 2011)
Actual Expense Method (calculate total costs of maintaining and driving your car, then multiply by the percentage of business miles to total miles driven in that car)

"The main thing the IRS will want to see in supporting this deduction is your mileage log," says NASE National Tax Advisor Keith Hall. "You must keep track of the miles you drive for business, whether it’s on your computer or handwritten in a notebook."

The NASE iPhone application TripAlly tracks, calculates and records miles driven to create the ultimate tax-deduction mileage log. Whether you need to track miles for your small business, charitable contributions, for employee reimbursement, or simply because you want to know, TripAlly can help. Download TripAlly at the iTunes App Store.

Click here for more details on TripAlly. Also check out IRS Publication 463, Travel, Entertainment, Gift and Car Expenses for more detail.

Small Business Worker Classification: Independent Contractor Or Employee?

NASE — Thursday, 10 February, 2011 14:35:00 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander, NASEtweets

IRS Sets Important Distinctions Come Tax Time

Washington, D.C., February 10, 2011 – The self-employed contribute a mighty portion to the U.S. economy – nearly $1 trillion. There is no question that they are helping create jobs by growing and hiring new workers. The question is, by hiring additional workers, are micro-businesses (those with 10 or fewer employees) actually creating more paperwork for themselves?

“Determining whether a new worker is an employee or an independent contractor can be tough,” says Keith Hall, National Tax Advisor for the National Association for the Self-Employed (NASE). “Keep in mind that you can’t just choose which one is easiest. It really depends on who calls the shots day to day.”

As a firm grows, many business owners decide to begin using other workers to help manage the needs of new and existing clients. At that point, the business owner must determine the tax classification for the new position he or she just created. Many small businesses think that this distinction is a matter of choice. Not so, says the Internal Revenue Service (IRS).

It is extremely important to know the classification of your workers and to make sure you pay them correctly and then report those payments correctly to the IRS at the end of the year. The IRS actually uses a multi-step checklist to evaluate whether a person is an employee or an independent contractor. If you are unsure whether to classify your newest worker as an employee or an independent contractor, here is a quick way to sort them out:

If you control the Who, Where, When and How the work is done, then they are probably an employee. This means that you, as the business owner, must file a Form W2, withhold income and payroll tax, and potentially contribute to their retirement plans.
If the worker controls their own work product and even has other customers besides you, then they are most likely independent contractors. Payments to independent contractors are reported on IRS Form 1099, and the independent contractors are responsible for their taxes and their own tax forms, including Schedule C, Profit or Loss from Business and Schedule SE, Self Employment Tax.

“It’s very important to get the decision right, because the IRS can certainly come in later and second guess, which could potentially lead to penalties and interest if taxes were underpaid,” adds Hall.

This is certainly a complicated issue and a very important one as small businesses continue to create jobs. For more details on how to classify a worker, visit the IRS online [www.IRS.gov] where you can download Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

The National Association for the Self-Employed (NASE) also offers micro-business tax advice from certified public accountants through TaxTalk. Submit your question and receive an answer from qualified CPAs at the NASE’s Tax Resource Center.

Self-Employed: Take An SE Tax Deduction For Health Insurance Costs

NASE — Thursday, 3 February, 2011 10:20:00 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander, NASEtweets

Temporary Tax Provision For 2010 Creates Level Playing Field For Micro-Businesses

Washington, D.C., February 3, 2011 – For the 2010 tax year, self-employed business owners can have one more deduction to claim – their health insurance costs. The Small Business Jobs and Credit Act, passed last fall, provides an important tax break for the over 23 million self-employed Americans by allowing them to deduct health insurance costs in determining Self Employment Tax. These businesses represent 78 percent of all small businesses in the U.S., according to the National Association for the Self-Employed (NASE).

To qualify for this deduction, self-employed business owners must meet the following three criteria:

File a Schedule C or Schedule E with net earnings from self employment
File a Schedule SE and pay self employment tax
Pay health insurance costs during the year

“This is a major step forward in addressing the single most important factor facing the self employed business owner when it comes to health insurance, and that is affordability,” says Keith Hall, the NASE’s National Tax Advisor. “By allowing health insurance costs to be included as a deduction in the calculation for Self Employment tax, most small-business owners can save as much as 15% on the cost of health coverage right off the top.”

To calculate estimated savings, simply add up total 2010 health insurance costs and multiply by 15 percent. If, however, income is above the maximum wage limit subject to self employment tax, currently $106,800, then the total percentage savings will be a little different.

Until now, the self-employed couldn’t get the same tax benefit for health insurance expenses that other companies enjoy. Now, the self-employed can take a one-year tax deduction for these costs in determining their payroll tax (self-employment tax). Unfortunately, this deduction is only available for the 2010 tax year.

“We should all take the time to let our Congressional leaders know that this provision should be extended beyond just this year,” advised Hall. “Other entity forms such as corporations and big businesses get this same type of tax benefit every year, and it is only fair that small-business owners should have the same opportunity.”

Visit www.NASE.org to find out how to contact your representatives in Washington, D.C. and let them know that you support this provision.

How To Prepare Your Micro-Business For Future Audits

NASE — Thursday, 18 February, 2010 13:38:43 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander, NASEtweets

NASE National Tax Advisor Says ‘Don’t Panic’

Washington, D.C., February 17, 2010 – Since last November, the Internal Revenue Service (IRS) has undertaken a three-year campaign to review the tax records of nearly 6,000 randomly chosen businesses as part of their National Research Program. The goal is to figure out which areas of the tax code lead to greater noncompliance. The data collected is intended to help the IRS minimize the tax gap, or the amount the agency is owed versus the amount it collects each year.

The National Association for the Self-Employed (NASE) knows that many self-employed business owners meet their tax obligations fully, so the audit process need not be feared. For this particular round of IRS audits, business owners will be asked to provide documentation from three years prior. The focus will be in four areas, including worker classification, fringe benefits, reimbursed expenses and compensation of the business owner.

"The first thing I tell business owners is not to panic if they are facing an audit," says NASE National Tax Advisor, Keith Hall. "As long as you have adequate records and are organized, then it is a relatively simple process. You may even get an additional refund."

Preparing taxes that will sail through the audit process is as easy as following the Three Cs of Tax Preparation:

1) Careful recordkeeping – Keep good records and notes to support each number on the return. Take the time to do this now, since the information submitted will not likely be reviewed until years later. You do not want to be stuck figuring out what was on line 21 of a past tax return from that long ago.

2) Check the math – There are many good software packages designed to help you correct easy mistakes and reduce headaches in the long run, such as TurboTax, TaxCut or even the IRS online filing options.

3) Consider a professional review – Multiple sets of eyes are better than one. It can be worth your time to have a tax professional review the return. Even if he or she does not prepare it from start to finish, a simple review of the work you have done is always helpful. This is especially true if you have a new issue this year, such as your first year of self employment, or hiring a new employee.

The NASE offers numerous tax tools and other tips to help you get through current and future tax season. For help organizing your taxes, visit the NASE's Tax Resource Center or ask our TaxTalk CPAs a question.

‘Schedule C’ Tax Book De-Mystifies Tax Filing For Nation’s Growing Ranks Of Entrepreneurs

NASE — Monday, 11 January, 2010 16:45:00 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander, NASEtweets

Line-By-Line Guide To The Schedule C And Home Office Deduction Tax Forms

Washington, D.C., January 11, 2010 – Just in time for tax season, the nation’s 22 million micro-business owners have a book to help them successfully navigate Schedule C for reporting 2009 taxes and for mapping their tax strategies for the year ahead. Authored by two of the nation’s leading self-employment and tax experts, Schedule C: from A to Z de-mystifies federal tax codes and guidelines that specifically apply to sole proprietors to help filers minimize their tax liability and avoid filing mistakes that can trigger an audit by the IRS.

“As the backbone of the nation’s economy, it’s critical that the self-employed receive every deduction they are entitled to as the basis for reinvesting in their businesses, especially in today’s challenging environment,” says author Robert Hughes. “Through this book, owners can easily become more educated and informed about Schedule C - a key element of business success.”

Using a simple-to-follow tutorial approach, the book takes owners step-by-step through each line of the Schedule C form and includes information to educate fliers on IRS rules they many find complex. The book helps entrepreneurs better organize records throughout the year to yield more thorough record-keeping and better, more productive reporting.

In writing Schedule C: from A to Z, Hughes and co-author Keith Hall have drawn heavily from their vast experience in working with the self-employed, as well as more than 20 years as CPAs and micro-business owners. Hughes is president of the National Association for the Self-Employed (NASE) and Hall is Chief Operating Officer. Both have worked extensively with small-business owners and have witnessed the effects of various laws and regulations first-hand.

One of the keys to successful filing is knowing how to properly categorize expenses, since mistakes in this area can easily trigger an audit by the IRS, and tax rules on itemization are not always intuitive. The book flags reporting areas that often are misinterpreted by filers and offers tips to help identify all feasible and legal deductions.

Practical Tips for Avoiding Problems, Confusion
For each line and category of the Schedule C form, Hughes and Hall explain IRS interpretation, along with a checklist of what can and cannot be reported under each heading. Common misconceptions and pitfalls to avoid also are featured for each line. For example:

The book advises close scrutiny of categories that on the surface may sound like catch-all reporting sections, such as line 18 – “Office Expense.” Despite wording that suggests otherwise, this category is not intended for the reporting of expenses pertaining to office supplies, furniture or rent, which are to be reported elsewhere on Schedule C. Instead, this category is for reporting a litany of miscellaneous items, from janitorial services and bottled water to maintenance service for plants. Expenses related to telephone answering services are to be reported here, but not those related to voice mail service (which are reported with telephone expenses under “Other Expenses”). Publications for a waiting room go under line 18, “Office Expense,” but if publications are for use by employees, those items must be reported separately under “Other Expenses.”
Another section for common filing errors is one of the most frequently used by sole proprietors – “Travel, Meals and Entertainment” (line 24). The authors note that entrepreneurs can deduct 100 percent of travel expenses under “Travel” (line 24a), but expenses must meet all of four specific requirements, including the requirement of being away from home long enough to require rest, which basically means an overnight stay. Although filers report 100 percent of their expenses for meals and entertainment on line 24b, the actual deduction they can take for these costs is limited, so calculation is required to determine the amount that can be deducted. The book walks readers through how to do this math.
Schedule C is loaded with categories and terms for which the IRS has very distinct meaning, the book notes. For example, in IRS nomenclature, “Repairs and Maintenance” (line 21) are expenses that keep property in ordinary and efficient operating condition. On the other hand, “Improvements” add to the value of the property or prolong its useful life and are considered capital expenditures and added to the cost basis of the property. These expenses are reported on line 13, “Depreciation and Section 179 Expense Deduction.”

As an added bonus, the book also includes a line-by-line breakdown of Form 8829, commonly known as the home office deduction. Sixty percent of the NASE’s micro-business membership work from a home office, yet many fear the home office deduction as an audit trigger.

“The self-employed and owners of micro-businesses often don’t have the resources to hire staff or outside experts to help them figure out complex and confusing tax laws and regulations,” says Hall. “This guide is presented as an easy-to-digest tool that will help owners better understand tax rules and minimize their tax liability.”

For more information about Schedule C: from A to Z, visit www.NASE.org or call 800-649-6273. Order Schedule C: from A to Z on Amazon.com.

IRS Recommends New Requirements For Tax Return Preparers

NASE — Friday, 8 January, 2010 12:34:43 EST

In June 2009, IRS Commissioner Doug Shulman called for a comprehensive review of the paid tax return preparer industry, drawing on all relevant data and input from interested parties. The goal was to produce a comprehensive set of recommendations to better leverage the tax return preparer community, fostering higher compliance with the law by taxpayers and better service to taxpayers through higher standards of conduct by paid return preparers.

Based on this review, the IRS has announced a number of steps that it plans to implement for future filing seasons. These steps will not be in effect for the current 2010 filing season. The IRS’s January 4 recommendations include the following measures:

- Requiring virtually all paid tax return preparers to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment, and business tax returns and that the tax due on those returns has been paid.
- Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.
- Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents, and others who are already subject to continuing education requirements.
- Extending the ethical rules found in Treasury Department Circular 230 to all paid preparers. Currently, these rules only apply to attorneys, CPAs and enrolled agents who practice before the IRS. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.

The IRS’s recent review of the tax return preparation industry and its recommendations are highlighted in the full IRS report.

For more articles like these, visit the SBA Office of Advocacy blog.

Ramped Up Task Force Could Focus On Micro-Business Tax Compliance

NASE — Wednesday, 1 April, 2009 13:00:00 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander

Lawmakers Have Blamed Small Businesses For Large Portion Of Uncollected Taxes

Washington, D.C., April 1, 2009 -- The Obama Administration recently announced its plans to step up the search for noncompliant taxpayers as one method for offsetting a massive budget designed to help shore up economic losses for the nation. A newly formed Task Force on Tax Reform will concentrate on the tax gap – a $300 billion difference between what the Internal Revenue Service is owed and what it collects.

"The Task Force on Tax Reform that will be formed...will be examining ways of being even more aggressive on reducing the tax gap, which could provide funding for tax provisions, including an extension of the Making Work Pay tax credit," said Peter Orzag, Office of Management and Budget Director.

In the past, lawmakers have pointed to underreporting by the self-employed as a significant contributor to the tax gap, a claim the NASE has worked hard to refute. The association has countered that an effective strategy to increase tax compliance should include overall simplification of the tax code, the elimination of issues that are inequitable to entrepreneurs, and greater access to reliable taxpayer education and outreach, not just an increase in enforcement activities.

Under the Bush Administration and the previous Congress, tax gap proposals placed an undue burden on micro-businesses. Those included imposing withholding on non-employee payments, specifically payments made to independent contractors; requiring information reporting on all payments of $600 or more to corporations; and demanding businesses that utilize contractors to obtain and verify an accurate Taxpayer Identification Number (TIN) for those contractors receiving payments of $600 or more.

Kristie Arslan, Executive Director of the NASE's Legislative Offices, testified before the House Committee on Small Business last year against the annual reporting of electronic payment transactions to the IRS. Although some have supported this measure as a solution to the tax gap, the NASE is opposed to this legislation because of the increased tax regulation it places on small businesses and because it likely would not boost tax compliance.

While the NASE believes the IRS should be able to collect all the money owed, increasing the burden on micro-businesses is not the most effective way to increase compliance. A strategy to increase tax compliance should include overall simplification of tax code, the elimination of issues that are inequitable to entrepreneurs, and greater access to reliable taxpayer education and outreach.

Visit the NASE in Action page to read recommendations on how to increase tax compliance without burying the nation's entrepreneurs under burdensome regulations.

NASE Lauds Home Office Deduction Simplification Act

NASE — Friday, 20 March, 2009 14:08:00 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander

Schedule C Filers Would Receive $1,500 Standard Deduction

Washington, D.C., March 20, 2009 -- Business owners who work out of an office in their homes could save an additional $1,500 on their taxes next year. Legislation introduced by Congressman Kurt Schrader (D-OR), Chairman of the Finance and Tax Subcommittee of the House Small Business Committee, and Congressman John M. McHugh (R- N.Y.) would make it easier for home businesses to deduct office expenses by offering a $1,500 standard deduction to eligible taxpayers. The Home Office Deduction Simplification Act (H.R. 1509) would also require that the amount be indexed for inflation.

"We need to do everything in our power to make small businesses a central part of our economic recovery," said Schrader. "This bill will streamline the tax process that often puts an undue burden on entrepreneurship. The increased use of the home office deduction will also allow small businesses to put these savings back into the economy. That means hiring more workers, expanding their businesses, and helping rebuild our economy.

Many business owners cite complexity of the criteria to qualify as too cumbersome to follow; others also cite a fear being audited as their reason to avoid the deduction. The NASE has advocated for the simplification of the tax code for many years; three in five micro-business owners had never utilized the current home office deduction said the option of a standard deduction would encourage them to take it.

"The ability to choose a standard deduction would remove the top barriers for home business owners – being confused by the qualification criteria and being scared they'll be red-flagged for an audit," said Kristie Darien, executive director of the NASE legislative office. "Congress has taken an important step with this legislation that allows qualifying home-based businesses to more easily employ this tax benefit. Too many sole proprietors have shied away from taking the home office deduction despite being eligible for it."

The option of a $1,500 standard deduction would not preclude taxpayers currently qualifying for the home office deduction from continuing to itemize their expenses should they choose. The Home Office Deduction Simplification Act would simply offer a taxpayer-friendly way to take the deduction. Additionally, if passed by Congress, it would significantly minimize the paperwork and time spent on tax preparation for entrepreneurs managing their business out of their home.

House Members Work for Tax Fairness for Self-Employed

NASE — Wednesday, 18 March, 2009 14:12:00 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander

Bill Would End FICA Tax On Health Insurance Premiums, Reducing Cost Of Health Care for Self-Employed

Washington, D.C., March 18, 2009 -- Recently introduced federal legislation would level the playing field for 21 million self-employed Americans by ending a significant double-digit disparity in taxes paid on health insurance that has contributed to the growing health care crisis. The Equity for Our Nation's Self-Employed Act (H.R. 1470), introduced in the House of Representatives by Reps. Wally Herger (R-CA), Ron Kind (D-WI), Suzanne M. Kosmas (D-Fla.) and David G. Reichert (R-WA) would eliminate an inequity in the tax code that inhibits the self-employed from receiving a full deduction for health insurance costs.

"We ought to be encouraging sole proprietors, not penalizing them. Yet the tax code currently does just that," said R. Michael Beene, Senior Health Policy Expert and General Counsel for the NASE. "This bill puts the self-employed on equal footing with other American businesses, addresses an area that has too many uninsured individuals and families and rights a wrong at a time when we most need it. On behalf of the NASE and its 200,000 members we offer our full support."

In addition to leveling the playing field for our nation's smallest businesses, this legislation would assist in making health care more affordable for millions of self-employed Americans who currently make up a substantial number of the working uninsured. Today, more than 60 percent of the 47 million uninsured Americans are from families working for a small business or headed by a self-employed individual. In a 2008 NASE study, more than 65% of micro-businesses cite cost as the single most significant barrier to offering health insurance to employees.

Payment of Self-Employment Tax on Premiums

The tax code technicality resulting in the health-care cost inequality lies in the payment of self-employment tax on health insurance premiums. While corporations are able to deduct health insurance premiums as a business expense and to forego FICA (Social Security and Medicare) taxes on these expenses, sole proprietors are unable to deduct premiums and are required to pay an additional 15.3 percent self-employment tax on these costs.

Studies have indicated that on average in the United States a self-employed individual pays $12,106 annually in health insurance premiums for family coverage. Since owners are unable to deduct their premiums as a business expense, as larger businesses do, they have a higher self-employment (FICA) tax liability. In this case a sole proprietor would be paying an additional $1,852.22 (15.3 percent) in taxes.

NASE Member John Rutledge is from Ruther Glen, Virginia and owns a real estate title research company. He pays an additional $1,652.00 in taxes annually on his health costs and can think of many other uses for the money. He remarks, "I could hire an office assistant to assist with some of the day-to-day administrative functions of the business or an IT professional to guide our expansion. We could easily double our outcome with this help."

Curious about previous legislation on this issue or how the self-employment tax is calculated? Visit NASE Advocacy online.

Small Business Worker Classification: Independent Contractor Or Employee?

NASE — Thursday, 26 February, 2009 13:00:00 EST

For Immediate Release:

Contact:

Kristin Oberlander
(202) 466-2100
koberlander@NASEadmin.org
Twitter: koberlander

IRS Sets Important Distinctions Come Tax Time

Washington, D.C., February 26, 2009 -- The federal government reports that 70-80% of all new jobs are created by small businesses – congratulations to the nation's self-employed for being major contributors to the economy! The question is, by hiring additional workers, are micro-businesses (those with 10 or fewer employees) actually creating more paperwork for themselves?

As a firm grows, many business owners decide to begin using other workers to help manage the needs of new and existing clients. At that point, the business owner must determine the tax classification for the new position he or she just created. Many small businesses think that this distinction is a matter of choice. Not so, says the Internal Revenue Service (IRS).

It is extremely important to know the classification of your workers and to make sure you pay them correctly and then report those payments correctly to the IRS at the end of the year. The IRS actually uses a multi-step checklist to evaluate whether a person is an employee or an independent contractor. If you are unsure whether to classify your newest worker as an employee or an independent contractor, here is a quick way to sort them out:

If you control the Who, Where, When and How the work is done, then they are probably an employee. This means that you, as the business owner, must file a Form W2, withhold income and payroll tax, and potentially contribute to their retirement plans.

If the worker controls their own work product and even has other customers besides you, then they are most likely independent contractors. They are responsible for their own forms, including Schedule C, Profit or Loss from Business; Schedule SE, Self Employment Tax and Form SS-4, Application for Employer Identification Number.

This is certainly a complicated issue and a very important one as small businesses continue to create jobs. For more details on how to classify a worker, visit the IRS online [www.IRS.gov] where you can download Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

The National Association for the Self-Employed (NASE) also offers free micro-business tax advice from certified public accountants through TaxTalk. Submit your question online at tax.NASE.org.