The Health Care and Education Reconciliation Act of 2010 signed into law on March 30, 2010 contains several provisions that may affect restaurant establishments and their employees. Among those provisions are a new reporting requirement for health insurance, an additional 3.8% Medicare contribution tax on investment-type income, and increases to the Medicare tax on wages and self-employment income by .9%.
Following are selected highlights of these issues from several other Schenck articles. Click each of the blue headings to view the original article and additional details.
Contact Mike Stratman of our Retail team at 800-676-0829 to discuss options for you and your business as you prepare for these changes.
If you filed 250 or more W-2 forms for wages paid in calendar year 2011, you will most likely have to comply with new rules requiring large employers to disclose the cost of group health coverage on W-2 forms for wages paid in 2012. The new requirements generally apply to both insured and self-insured health plans. For now, reporting is optional for smaller employers.
Originally scheduled to take effect a year earlier, the requirements now apply to 2012 Forms W-2 that will be due by the end of January 2013. They exclude very few types of large employers.
The new rules can be confusing because they require employers to report some types of payments on Form W-2 in box 12 using Code DD, prohibit reporting certain other types of payments, and allow optional reporting of other types of payments at the employer’s discretion.
The IRS makes it perfectly clear that reporting the cost of health care coverage is for informational purposes only. It does not mean that the coverage is taxable.
Here’s a summary of some of the key points of the new reporting requirements:
- The amount to be reported includes both the portion of the cost paid by the employer and the portion paid by the employee, regardless of whether the employee pays with pre-tax or after-tax contributions.
- The reportable cost must be determined on a calendar year basis.
- The IRS indicates that there are three methods for calculating the cost of health coverage:
- COBRA applicable premium method
- Premium charged method
- Modified COBRA premium method
- If the cost of health coverage changes during a year, these changes must be taken into consideration.
The new Medicare contribution applies to all individuals with net investment income and modified adjusted gross income (MAGI) above a threshold amount. The tax applies to the lesser of net investment income or MAGI above the applicable threshold. MAGI is adjusted gross income (AGI), increased by any foreign earned income that would otherwise be excluded from adjusted gross income. The threshold amounts are:
- $250,000 – Married filing joint and surviving spouse
- $125,000 – Married filing separately
- $200,000 – Single and head-of-household
Net investment income includes interest, dividends, annuities, rental income, and royalties, unless those items are derived in the ordinary course of business in which you actively participate (other than a business trading in financial instruments and commodities). Net gain attributable to the disposition of property, other than property held in a non-passive trade or business, is subject to the tax. This includes the gain from an installment sale, as well as from the sale of personal assets, such as the sale of a principal residence, vacation home, or cottage. However, the gain from the sale of a principal residence that is excluded from income under IRS §121 ($250,000-Single/$500,000-Married Filing Joint) is also excluded from the Medicare contribution tax.
Net investment income does not include Social Security benefits, distributions from qualified pension, profit-sharing and stock bonus plans, qualified annuity plans, IRAs and Roth IRAs, and eligible deferred compensation plans. Tax-exempt interest is also excluded from net investment income.
The current Medicare tax rate of 2.9% applies to employee compensation and net self-employment income. If you are an employee, 1.45% is withheld from your wages and the other 1.45% is paid by your employer. If you are self-employed, you are responsible for the entire 2.9%. Starting with income received after December 31, 2012, the Medicare tax increases to 3.8% on earnings in excess of $200,000 if you are unmarried or $125,000 if you file married-filing-separate. For those that are married and file a joint return, the extra .9% tax will apply to the combined compensation and/or self-employment income above $250,000. It is also important to note that these amounts are not set to be increased for inflation. The employee is responsible for the entire tax increase, increasing the employee’s rate to 2.35%. This means that the additional tax will not be deductible for self-employed taxpayers.
See the IRS’ Q&A on the Additional Medicare Tax for more information about the new .9% Medicare tax. This covers how the new rules apply to various payments such as fringe benefits, tips, group term life insurance, third-party sick pay, and nonqualified deferred compensation.
Additional Health Care Reform Act provisions
- Annual contributions to a health flexible spending account reduced from $5,000 to $2,500 for plan years beginning after December 31, 2012. Please remember to amend your plan documents.
- Medical expenses on Schedule A for 2013 for most people will need to exceed 10% of adjusted gross income.
- For 2014 comes with a mandate for US citizens and legal residents (some exceptions) to carry health insurance.
- Also in 2014, large employers are mandated to provide health insurance. A large employer has at least 50 full-time employees (FTE) for more than 120 business days in the preceding calendar year. An FTE is based on more than 30 hours per week.
For more information on the impact of Health Care Reform on your business and personal financial situation, view our Health Care Reform Act webinar. Or, contact your Schenck advisor or Mike Stratman at 800-676-0829.
Mike Stratman, CPA, manager, works with clients in a variety of industries including retail, construction, manufacturing and service. His experience includes providing accounting, tax planning, and consulting services to small business owners.