Don’t call it the Obama health care tax.
On Sunday, Health and Human Services Secretary Kathleen Sebelius clarified on CNN’s State of the Union that the proposal being considered in Congress to tax employer provided health care benefits was not endorsed by her boss. Obama had opposed such a tax during his candidacy; his opponent, Sen. John McCain had supported the plan.
But now that a similar plan is making its way through Congress, the White House wants taxpayers to understand that he’s not a fan of the proposal. No wonder since several recent surveys show an overwhelmingly opposition to taxing benefits. Sebelius did not, however, refer to the plan as a “deal breaker” leaving the door open for an Obama endorsement if Congress can’t come up with something better.
Obama favors a cap on tax exemptions for those making more than $250,000 per year. This is the same plan that he proposed months ago – a plan which Sen. Max Baucus (D-MT) then opposed, questioning whether the plan would work.
It’s no surprise that the GOP joined with Dems in rejecting Obama’s proposal even though the Obama administration tried to play the “Reagan card” by pointing out that the caps would bring limits back to the Reagan years. The GOP opposes any cap on exemptions and instead, as blogged earlier, proposes a new tax on the benefits of the most expensive employer-provided health insurance plans, the so-called Cadillac plans. Sen. Lamar Alexander (R-TN) is one of the most vocal supporters of tweaking tax benefits for Cadillac plans, possibly in conjunction with a plan that would give employees cash to buy their own private insurance.
So let me sum up… The GOP said yes to taxing health care benefits in fall, and the Dems said no. Then the Dems said yes – and no – while several key members of the GOP said no. Obama keeps saying no – but not “deal-maker” no. And the GOP decides to go back to the plan from earlier.
Anyone getting the real sense, as Sen. Judd Gregg (R-NH) that the chances of passing a health care reform bill before the August break are “very unlikely”? Hands up… Yeah, that’s what I thought.
Senator Max Baucus (D-MT) isn’t a fan of limiting the itemized deductions for higher wage earners. I’ve said before that I’m not a fan of the idea and I don’t think it will pass in Congress.
But Baucus has another idea. He’s asked Treasury Secretary Geithner whether the Obama administration would consider changing the current tax preferred treatment given to employees who receive health care insurance through their employers. Under the current law, the portion of health insurance premiums paid by the employer is treated as tax free income to employees. That exclusion is equal to $246 billion in foregone revenue, reportedly the federal government’s single biggest tax expenditure.
Baucus is not necessarily in favor of eliminating the plan. He said:
I think that tax provision should be on the table. It’s currently too aggressive. I do not favor eliminating it. But I do think it needs to be trimmed, limited.
Trimmed? Limited? I thought we were supposed to be looking for ways to make health care more affordable for Americans.
To be honest, as a tax policy, I do think the rule is flawed. It doesn’t help the self-employed or those folks who have to pay out of pocket because they don’t receive health care as a perk. It’s only good for employees who receive health care as a benefit from their employers. So yes, it’s a big chunk of foregone revenue for a limited segment of the population.
But to consider increasing taxes on the middle class (cause that’s what you’re doing when you reduce or eliminate those tax benefits) in the midst of a bad economy? I’m just not getting it. How is that helping?
The average cost of insurance for an individual is $4,704 per year. If made taxable, that would increase the tax bill of the middle class by $1200 to $1300. That’s not an insignificant increase.
Of course, Baucus isn’t the first to test these waters. Democrats have proposed similar plans before and Sen. John McCain (R-AZ) offered a variation on the scheme during his presidential run. And I’ll be one of the first to say that I don’t think, from a tax policy perspective, that it’s without merit. But the timing and the implementation so far? They leave a lot to be desired.
I guess Baucus can be glad that he didn’t ask me what I thought…
Obama said during his campaign that he would not be in favor of taxing employee health benefits. Nonetheless Geithner said this week that the idea wasn’t off the table.
What do you think? Is this the way out of our current health care mess?
Taxpayer asks:
Hi Kelly,
Here is the situation i worked for a doctor’s office for two months and she informed me that I did not need to pay taxes because I was a temp. Ten months after I left the job she started asking me for my information because she said the tax laws have changed and she has to with hold taxes from me. Not knowing what to do I ignored her, and later on that month she sent me a 1040. I took this to the accountant and I paid the taxes that was needed to the IRS and the State of California. My questions is are there going to be any repercussions on my part since I’m technically not a independent contractor? And Is what she did legal?
Thanks,
Taxgirl says:
I’m not exactly sure what happened in your situation – withholding is something that happens for employees, generally, but not independent contractors. And the rules didn’t change with respect to how those are governed – perhaps your employer’s understanding of the rules changed?
The bottom line is that your employer should have treated you as an employee if you were an employee, even if you were only there for a brief period of time. You can be an employee even if you only work one day – generally speaking, whether or not you are an employee or independent contractor is not governed by the amount of time that you work, but by a combination of factors.
Factors to be considered can be found both in common law and in Revenue Ruling 87-41. They include:
- Are you subject to the employer’s instructions?
- Does the employer provide training?
- Do you personally perform the services?
- Is the employer responsible for hiring, supervising and paying assistants?
- Is there an ongoing relationship?
- Does the employer determine when you work?
- Is full-time work required?
- Do you work on the employer’s premises?
- Are oral or written reports required?
- Does the employer pay the majority of business and/or traveling expenses?
- Is the employer responsible for the furnishing of tools and materials?
- Are you free from risk or significant investment with respect to the work being performed?
- Are you working solely for the employer?
- Have you stopped offering your services to the general public?
- Can you be fired for any reason (as opposed to contractually bound to perform services)?
While each of these factors really depends on your personal facts and circumstances, the more times that you can say “yes” to the those questions, the more likely it is that you’re an employee.
Don’t assume that you’re an independent contractor because the employer says so – or because you’re merely part time or temporary. Remember, it’s a set of circumstances, not a magic question. There is no such rule that says that only full time, long term workers can be classified as employees. If you have any questions about your status, ask. And if you don’t agree with the answer, talk to a tax professional.
In your particular case, so long as you’re square now, I wouldn’t waste anymore energy on what happened. It sounds as if your employer was confused and fixed it halfway through the term of your employment. So long as your accountant felt like it was resolved appropriately, I would simply move on and not spend another minute worrying about it.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
I was working as an independent contractor in this small company. At that time, I was getting paid with no taxes being withheld. I assumed I was getting paid under the table, but 6 months after I stopped working there I received a phone call from them asking for my SSN. I did not give them my SSN.
Also, during the time I was working for them I was collecting unemployment insurance and since no taxes were being withheld I was declaring I was not working so I could keep collecting EDD money.
Do I have any rights to withhold my SSN after 6 months not working for them. I’m afraid if I do give them my SSN and didnt declare this income I will get penalized for not declaring income to EDD.
Any advice for me?
Taxgirl says:
It’s important to remember that your employer is not your friend. An employer who suggests that you might be paid “under the table” is definitely not your friend, for about a million reasons.
No matter how many times an employer thinks it might be cheaper to pay you under the table, it’s not. An employer’s share of taxes attributable to an employer is ultimately much smaller than the share of taxes attributable to an employee. Additionally, wages paid to employees and independent contractor are also deductible as a business expense. So, from a financial perspective, it makes more sense for an employer to report wages paid – even if they implied to you that they wouldn’t – not to mention that it’s, you know, illegal. There are all kinds of nasty things that can happen to an employer if they don’t report you properly and then you get laid off, injured, or become spiteful.
That said, just because you weren’t having taxes withheld does not mean that they were paying you under the table. If you were, in fact, properly classified as an independent contractor (and not an employee), the employer would not have been required to withhold taxes. It may have been their intention all along to claim you and they just weren’t terribly organized… Nonetheless, the employer should have clearly indicated to you the terms of your employment, including how you would be classified and paid. You should have also been asked to complete a federal form W-4 (for an employee) or a federal form W-9 (for an independent contractor).
It sounds like that didn’t happen. But now, it sounds as if they’re trying to do things on the up and up, and they want to issue you a form 1099 reporting your compensation. Your refusal to turn over your Social Security number won’t prevent them from reporting your compensation to the IRS. Most likely, they will write “REFUSED” in the space where your Social Security number should go and send it to the IRS.
You will be subject to a fine for not providing your Social Security number for purposes of the form 1099. The biggest issue here isn’t so much the fine but the fact that you’re going to open your tax return up for scrutiny. The IRS will receive a form 1099 with your name on it. If you don’t report the compensation associated with that form 1099, your tax return will likely be flagged for review. If you haven’t reported your compensation, you will be responsible for the taxes associated with the income as well as penalties and interest.
As for your unemployment compensation issue, that gets tricky. Unemployment compensation is paid out of funds which are pooled from federal unemployment and state unemployment taxes and insurance. Cheating, by claiming unemployment compensation when you are working, actually drives up the costs of business for your former employer (trust me, I run a business) since the employer’s rates are affected by your claim. Additionally, since unemployment benefits are being strained right now, many states, like New York and Utah, are aggressively pursuing fraud claims. If you are caught accepting unemployment compensation while you are actually working, you could be prosecuted. Most states will require that you repay the overage plus a substantial fine. You could be required to perform community service, be placed on probation and in some cases, you could be jailed. You could be also disqualified from further benefits for a period of time.
On the tax side, I always advise compliance. In your case, you are required by law to produce your Social Security number to your former employer and properly report the income on your taxes. I would suggest that you immediately contact an lawyer that focuses on unemployment compensation and get some good legal advice about your repayment and reporting options on the UC side. You don’t want to make a bad situation worse. Good luck!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
