March 1 came and went and the world was still standing.
Sequestration made a big splash at the end of February. Taxpayers were worried… How would it affect Tax Day? Would refunds be slowed down? Would the lights stay on in Congress?
But as March kicked off, tax season was (finally!) in full swing and it was business as usual in D.C. Nothing of any importance was happening, right?
Don’t be fooled. While a lot of the cuts were, in fact, hyped, the reality is that sequestration is going to affect taxpayers. We just have to figure out the “Who?” and “When?” And even though it’s easy to sit inside and not worry about cuts to Philly schools or New York homeless shelters – because those seem so very far away – it’s just a matter of time before the cuts hits closer to home for many taxpayers. First up: certain small businesses.
The Internal Revenue Service advised today that due to sequestration, there will be a reduction to the refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers. The refundable portion will take a hit of 8.7% effective immediately. The reduced rate will be in place to the end of the fiscal year (September 30, 2013) or until “intervening Congressional action” (In plain speak: The IRS hopes/expects that Congress will do something about this.)
The Small Business Health Care Tax Credit was intended to encourage small businesses to provide health care coverage to their employees. Under the law, a tax credit was made available for small businesses that paid at least 50% of the cost of single health care coverage. To qualify for the credit, small businesses must have fewer than 25 full-time equivalent employees with average wages of less than $50,000 a year. So, really, the little guys.
We all know that health care is expensive. Companies pay out nearly $180 billion for health care benefits for employees per year. That’s a big chunk of change. And it tends to hit small businesses pretty hard. I’ve often noted that, at my firm, the cost of insurance for my employees is second only to payroll: it’s more than our rent and utilities combined.
With that in mind, Congress decided that it was a good thing to provide incentives for small businesses to keep providing health care benefits. The credit allowed small businesses to recover a portion of the amount paid out of pocket for employee health care premiums. The credit extended to small tax-exempt employers, too, who were allowed a refundable credit so long as it didn’t exceed certain withholding and Medicare tax liabilities.
Now, with sequestration, that credit gets a haircut. Practically speaking, what that means is that health care benefits just got a little more expensive for those employers. Just like that. And considering that health care costs for employers are already increasing at about 8% per year (about four times the rate of inflation), that’s not insignificant.
No, it’s not Armageddon. And I’m not suggesting that it’s the end of the world. But hear that noise? It’s the chip, chip, chipping away at our small business economy.
