Employee-Related

Expired Deduction for Health Insurance When Computing Self-Employment Tax

In general, the self-employed (sole proprietor, partner or LLC member) must pay self-employment tax on business earnings. For 2011, the tax is based on net earnings from self-employment and is comprised of two components: a Social Security tax of 10.4 percent on the first $108,600 of your net earnings, and a Medicare tax of 2.9 percent on all of your net earnings.

In 2010, self-employed persons could deduct health insurance costs incurred for themselves, their spouse, their dependents and any child of the taxpayer who, as of the end of the tax year, had not attained age 27. This provision expired, however, and the deduction is disallowed for 2011. While this deduction can no longer be used to offset the employment tax, it can be subtracted from your gross income to help lower your liability.

Downside: Self-employed persons may pay more taxes in 2011 than in 2010 because the deduction is no longer available.

FUTA Tax

Generally, all employers pay FUTA tax to support federal and state programs that pay benefits to unemployed workers. The amount of FUTA tax owed by an employer is a percentage of the total amount of wages paid by the employer during the year, limited to the first $7,000 of wages paid to each employee during the year. The FUTA tax rate was set at 6.2 percent for many years, but it was reduced to 6.0 percent as of July 1, 2011.

If an employer is required to pay for a state unemployment program, the employer will be allowed a credit against FUTA tax. The credit is limited to 5.4 percent of wages, producing an effective FUTA tax rate of 0.6 percent in 2011 (for all of 2011, not just as of July 1).

Benefit: Employers pay lower FUTA taxes in 2011.

Worker Retention Credit

An employer may take an additional general business tax credit for each worker hired after March 18, 2010, and before Jan. 1, 2011, if the worker was previously unemployed and is retained for at least one year. Thus, although the credit is available for employees hired in 2010, the credit can only be claimed for tax years beginning in 2011.

The credit is equal to the lesser of $1,000 or 6.2 percent of the wages the taxpayer paid to the retained worker during the one-year period.

Benefit: Employers receive a higher general business credit.

Small Business Health Insurance Credit

Beginning in 2010, a credit is available for small business owners who pay at least half of their employees’ health insurance coverage. However, a number of criteria, including the number of employees, average wages, premium amounts paid, and average premiums by the state for certain coverage, all affect the extent to which the credit can be applied. Unfortunately, determining whether you are eligible the credit may be difficult, as the credit requires significant information analysis and complex calculations.

To qualify for the credit, which can reach 35 percent of the employer’s contribution, the employer needs to pay the equivalent of 25 or fewer full-time equivalent employees and average annual wages of less than $50,000. Small businesses with 10 or fewer full-time equivalent employees and average annual wages of less than $25,000 can receive the full credit.

The credit can be claimed for each tax year in which the employer qualifies in 2010–2013 and for any two years after that. It can also offset the Alternative Minimum Tax (AMT).

Benefit: It encourages small business owners to help pay for their employees’ health coverage, and in the process, reduces their own tax liability.