There are some changes that are set to happen with the Obamacare tax increases, and for which there are no serious Congressional changes in the pipeline (as of yet), and we should start preparing for these.
Medicare Tax Rate Changes
The Patient Protection and Affordable Care Act (i.e., Obamacare) included several tax provisions. Two of those provisions changed the administration of the Medicare Taxes that people pay every year.
Change 1: Effective January 1, 2013, once an employee (or self-employed individual) earns over $200,000 ($250,000 if married filing jointly), their Medicare tax withholding rate will increase from 1.45% (the historical employee withholding rate and the rate still in place under $200,000) to 2.35%. The employer's portion of the Medicare tax will remain at 1.45% regardless of the employee's salary level.
This means that for employees that will make more than $200,000 during the course of a year, your withholding rates will change 2 times during the course of the year: once when you are no longer subject to Social Security withholding and once when your Medicare withholding increases. If your employer does not withhold the proper amount from your pay, whether too much or too little is withheld, the employee will have to deal with this when filing his or her return at the end of the year per these Obamacare tax increases.
Change 2: Also effective January 1, 2013, a 3.8% Medicare tax will be imposed for the first time ever on net income from interest, dividends, capital gains, annuities, rental income, royalties, and sales of assets. This tax will be applied on the lesser of the individual's net investment income or the individual's adjusted gross income in excess of $200,000 ($250,000 for a married/joint filer). Therefore, this tax too will apply only to individuals earning over $200,000 per year ($250,000 if married filing jointly) Both of these requires major changes to the income tax return and will just add to the complexity for people attempting to complete their own returns under the Obamacare tax increases.
Of course, I would typically advise that if you are earning over $200,000 per year and holding or trading investment assets that are worth noting, that you hire a competent and experienced tax preparation company to prepare your return. I cannot count how many of my clients could have avoided a majority of their tax liabilities if they had simply used competent professional tax help in the preparation of their returns. Health Benefits Issues for Employers Employers will now have to start reporting the cost of employer-sponsored health coverage on Forms W-2. As a general rule both employer-paid and employee-paid portions of health coverage will need to be reported. Employers will have to keep records health coverage on an individual-by-individual basis. For now, this reporting requirement is optional for employers who filed less than 250 W-2s in the previous year.
New compliance initiatives, aka "Form 720"
Employers will also have to start paying a new "fee" (it's really a tax) on health insurance plans. This fee is set at $1 times the average number of covered lives for the plan year for plan years ending prior to October 1, 2013. Each year thereafter, the fees will increase. Companies subject to this fee will need to pay the fees and file a Form 720 (Quarterly Federal Excise Tax Return). Although this return states that it is quarterly, and is for all of its other uses, this fee only has to be reported annually by July 31st of the calendar year following the last day of the plan year (according to proposed regulations – still subject to change).
I think that with all of the changes happening on the employer front it is essential now to find a payroll company or an H.R. company to handle many of these issues for smaller businesses. Make sure to ask whether they will handle the Form 720 filing for you. You may also find that you need more help than a payroll tax company is able to provide – especially if your payroll company is not willing to prepare the Form 720 for your company. In that case, contact us at 888-727-8796 or email firstname.lastname@example.org. We can help.