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:
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.
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I was honored to find that one of my articles for the Legal Intelligencer was posted on law.com. You can read the piece, which focuses on tax issues related to holiday gifts and bonuses for employees, by clicking here.
