• Health Insurance Deductions Keep Businesses Open
• Study Finds Small Businesses Competitive in Innovation Markets
• IRS Tips Help Correct Misclassified Employees
• Member Poll: A Taxing Time for Micro-Businesses

Health Insurance Deductions Keep Businesses Open

NASE Members say that one of the largest barriers to leaving the corporate world for self-employment is having to give up benefits such as health insurance. Even salaried workers that share the cost of their premiums with their employer are allowed to pay for those premiums with pre-tax money. But the self-employed have a different tax treatment for health insurance premiums. Prior to 1987, the self-employed were forced to pay taxes on health insurance costs in both their income and payroll taxes. A law passed that year allowed the self-employed to deduct their health insurance costs from their income tax. A recent study by the Small Business Administration Office of Advocacy seeks to quantify how much that treatment affects a small business closing shop. It finds that when the self-employed are able to deduct their health insurance premiums, the rate at which they close the business decreases. The study shows that the health insurance deduction for the self-employed has decreased the likelihood of businesses closing by 10.8 percent for single filers and 64.9 percent for married filers. Additionally, the absolute dollar amount of the health insurance premium deduction also influences the probability of a business staying open. For single filers a 10 percent increase in the amount of the deduction reduces the probability of closing by 10.6 percent. For married filers the probably of closing is only reduced by 1.2 percent. While this study evaluated the impact on income taxes, the self-employed are still forced to pay self-employment (FICA) taxes on health insurance premiums at a rate of 15.3 percent. Unlike corporations, the self-employed cannot consider health insurance deductions as ordinary and necessary business expenses. The NASE’s top legislative priority is to eliminate the payment of self-employment tax on health insurance premiums to help lower the cost of health care for micro-business owners. Legislation introduced last month by Reps. Melissa Hart (R-PA) and Donald Manzullo (R-IL) would correct this inequity. The Equity for Our Nation’s Self-Employed Act would allow the self-employed to deduct the cost of health insurance from payroll taxes, thus making health insurance more affordable. To read the full report, visit http://www.sba.gov/advo/research/rs273tot.pdf. Tell your legislators to support the Equity for Our Nation’s Self-Employed Act by visiting the NASE Legislative Action Center at http://advocacy.NASE.org. Want Innovation? Think Small Another recent U.S. Small Business Administration (SBA) report found that the number of innovative, high-growth small businesses is rising, creating new competition for larger firms. The phenomenon of these fast-growth ventures may be attributed to their start as incubator programs, which conduct research at local universities. The SBA Office of Advocacy found a positive correlation between research and development spending at universities and the number of firms starting in neighboring communities. The success of these ventures ultimately results in greater profits for the firm, as well as increased employment in surrounding areas. William Baumol, economist and author of “Small Business Economy,” explains that the rise of small-business innovation is likely an effect of the “go for broke” mentality of new firms in the hopes that their idea will be a breakthrough. The report states that small patenting firms produce 13 to 14 times more patents per employee than their larger counterparts. Baumol explains that this is because large firms tend to make small, incremental changes, fearing financial loss. This new-found competition often ruffles the creative feathers of the larger firm, thus pushing the market to benefit the economy as a whole. The findings noted that the most small-business growth from innovation came from the technology sector, since they tend to be more accommodating to new fast-growing private firms. This was signaled by increased employment of scientists and engineers. For more information on the small business effect on the economy, visit http://www.sba.gov/advo/stats/sb_econ2005.pdf. IRS Tips Help Correct Misclassified Employees The IRS knows that most employers make every effort to meet their employment tax obligations, taking care to classify employees or independent contractors accordingly. But with the complicated rules surrounding employee classification, a micro-business owner could error and classify an employee as an independent contractor. If you find yourself in this situation, the IRS offers an in-depth review of how to correct the classification on their Web site. The article, “IRS Offers Tips on How to Correct Reporting of Misclassified Employees,” is part of an effort by the IRS Taxpayer Education and Communication office to help micro-businesses understand the tax code – and reduce a chance of misfiling, which could lead to fees and penalties. The full text of the misclassified employees article can be found at http://www.irs.gov/businesses/small/article/0,,id=155756,00.html. Some of the subjects is covers include the following: relief for employers who have made a classification error and an opportunity to correct the tax treatment of misclassified employees instances where penalties and interest apply circumstances under which an employer will not owe employment taxes for misclassified workers Additional information about worker misclassification and correction is available in Publication 1976, Section 530 Employment Tax Relief Requirements (PDF) and in Publication 15-A, Employer's Supplemental Tax Guide. Both publications are available on IRS.gov. Member Poll: A Taxing Time for Micro-Businesses Taxes are a source of frustration for the self-employed. The NASE has long supported tax simplification and tax fairness for micro-businesses. Please take this short member survey regarding your opinions on federal tax reform. Let the NASE know your opinions by visiting the MyNASE Web site at http://my.NASE.org/. Log in to your free MyNASE Web Account. If you have not set up an account, you can do so at http://my.NASE.org/ with your member number. Let your voice be heard in the association by taking this survey during March.