While the political future of the Affordable Care Act is unknowable, it has survived its courtroom challenge. That means many entrepreneurs will need to deal with important new tax provisions starting next year.
There are two important new ACA taxes taking effect in 2013:
- A new .9% payroll tax on single taxpayers with salaries exceeding $200,000, or joint filers with combined salaries exceeding $250,000.
- A new 3.8% tax on "unearned" income (a despicable description, by the way). It applies to income earned as interest, dividends, rents and capital gains. It also applies to income that is "passive" under the "passive loss" rules received on K-1s from S corproations, partnerships and trusts.
These taxes apply without regards to the insurance plans or coverage of either the employer or the employee; they are just taxes.
The payroll tax will require additional withholding on income that exceeds these numbers, but because the employer won't know an employee's spouse's salary, it will also require a new schedule on Form 1040.
These taxes will motivate more taxpayers to operate as S corporations with salaries below the thresholds covered by this tax. They will take more of their income as distributions of K-1 income rather than salary, because S corporation K-1 income isn't subject to this tax.
The .9% surtax will make some taxpayers operating in LLCs taxable as partnerships consider the S corporation format. Generally entrepreneurs who are active in an LLC pay self-employment tax on all of their earnings from their LLC K-1s. This will include the .9% surtax if their income is high enough, as well as the current 2.9% Medicare tax. By switching to the S corporation format and taking out a salary under the $200,000/$250,000 limits, they could save both the Medicare tax and the surtax.
The IRS may not take this sort of thing lying down. They recently forced an Iowa accountant to increase his reported wage income from $24,000 to over $90,000 annually to make him pay more medicare tax on his S corporation earnings. Still, there is a wide range of salaries that can be considered "reasonable" for this purpose, and the IRS has yet to show that they can force taxpayers to the $200,000 salary level.
The tax on "passive" income also makes it important for taxpayers, especially part-timers, to document how much time they spend working in the business in 2013. The most common test for whether a taxpayer is "passive" is whether they spend 500 hours working in the business. Taxpayers may want to get in the habid of keeping a time diary if their participation might be otherwise hard to document.
It's time for entrepreneurs to start pondering these issues for next year. Involvement of a qualified tax professional is important.