The Affordable Care Act (or Obamacare) has tax consequences for America’s families and small business owners. While business owners were originally given assistance in complying with these costly mandates, few took advantage of it. There are many higher taxes included in the ACA, but the four mentioned below have the biggest effects on business owners.
Under the Affordable Care Act, the Medicare tax for self-employment earnings and wages over $250,000 has increased to 3.8%. The direct increase in marginal tax paid by general partners, the self-employed, and on Subchapter-S earnings can be costly for small business owners, whose profits are typically taxed in the $250,000+ tax bracket. While the increase may seem slight, it is quite significant when it’s considered along with budgetary plans to increase top marginal income tax rates to 39.6%.
A Tax on Investment Proceeds
In 2013, the Affordable Care Act imposed a 3.8% surtax on investment proceeds; however, some of this ‘income’ is actually profit from small businesses. Passive shareholders and limited partners are subject to this tax increase. While business and active trade incomes are excluded, most of this money is subject to the higher Medicare taxes cited in the paragraph above. This provision of the ACA makes it harder for small business owners to raise the capital to expand operations and create jobs.
This isn’t as publicized as the individual health insurance mandate, but it still deserves attention. The employer insurance mandate, which took effect in 2014, applies to all companies with 50 employees or more. If the company does not offer qualifying coverage, the owner must pay a per-worker excise tax. When an employee faces a waiting period for a plan, the tax can increase by up to $600 per worker; a small company with 100 employees could owe up to $300,000 per year in taxes.
Many of America’s self-employed workers elect not to buy health insurance. They prefer to have a mini-med coverage plan or to instead use the money to invest in the business. However, self-employed individuals lose this option, thanks to the Affordable Care Act. As of 2014, everyone has to have qualifying coverage or pay an excise tax of a minimum of 2.5% of gross income. Many believe that the government is using the IRS as a weapon to force them to buy a product they don’t want. Consult the pros at redlands tax for ACA advice.