Health Care Self-Employment Tax is Unhealthy for Businesses
Will the government correct a hidden tax for 3.6 million Schedule C filers?
Amidst all of the debate surrounding our nation’s health care crisis, there is one issue affecting America’s small businesses that gets little attention – the hidden tax paid by Schedule C filers on health care premiums. There appears to be bi-partisan support for a correction to this inequity; yet budget pressures make a fix by Congress quite challenging.
In calculating income taxes, a self-employed health insurance deduction was implemented in 1987 and made permanent 10 years later. The deduction was incrementally increased until self-employed health insurance premiums were made fully deductible in 2003. However, this did not equalize the tax treatment of health insurance premiums, as self-employed health insurance premiums are still not deductible in payroll tax calculations.
Under the current tax code, while corporations are able to deduct health insurance premiums as a business expense and thus forego FICA (Social Security and Medicare) taxes on these expenses, Schedule C tax filers – including all sole-proprietors, partners in partnerships, LLC owners and S Corporation owners – must pay for their health insurance premiums out of earnings that are subject to the 15.3 percent FICA self-employment tax. According to IRS statistics, nearly 4 million small business owners paid self-employment tax on their health insurance premiums.
According to the Kaiser Family Foundation’s Employer Health Benefits 2006 Annual Survey, the self-employed pay an average of $11,480 for family health coverage. At a 15.3% tax rate, this amounts to a $1,756 annual “tax” on the typical non-corporate business owner who makes less than the FICA maximum salary of $97,500. This is a “tax” that is not paid by corporate shareholders.
Politicians, advocates rally support for small businesses
Correcting a disparity that unduly impacts small business owners based solely upon their legal form should be expected to have widespread support. Indeed, a broad coalition of small business groups across the political spectrum have formed an organization called the Coalition Supporting Equity for our Nation’s Self-Employed to lobby for a change in the tax code. Small business owners should be relieved to know that the National Federation of Independent Business (NFIB), the National Small Business Association (NSBA), Women Impacting Public Policy (WIPP), and state and local chambers of commerce across the country are on their side.
“NSBA enthusiastically supports legislation to correct this inequity and will make its passage a top priority for the association,” said Todd McCracken, the NSBA’s president. “It is time, once and for all, for small businesses to be put on an equal footing with large businesses when paying for health care.”
In the last (109th) Congress, bi-partisan legislation was introduced in both the House and Senate to allow self-employed individuals to deduct their health insurance premiums before calculating their FICA tax. Senator Jeff Bingaman (D-NM), one of the two lead sponsors of the Senate bill, along with Senator Craig Thomas (R-WY), noted that “the legislation…would stop…inequitable tax treatment” not faced by larger businesses. The House sponsors, Representative Don Manzullo (R-IL), and former Representative Melissa Hart (R-PA), stated that “the self-employed must have a fair and level playing field in order to start up, grow and be successful in their business.”
Despite these arguments for “fairness,” the bills went nowhere. While no member of Congress has been on record opposing the legislation, and many members acknowledge the obvious inequities, both the previous Republican leadership and the current Democratic leadership have been reluctant to push for changes in the tax laws that will further add to the growing budget deficit – particularly now that Congress has adopted a “pay-as-you-go” system. The most recent scoring of the legislation’s budget impact, done in 2003, estimated that it would cost $2 billion per year over 10 years.
Small business advocates cry foul, arguing that, regardless of one’s position on the deficit or tax policy in general, there is no reason why small businesses should bear a disproportionate burden solely based on how they are legally constituted.
“It is outrageous,” says Scott Hauge, a small business owner, president of Small Business California, and recent honoree of NSBA’s Small Business Advocate of the Year award. “This is just another example of how the deck is stacked against small businesses in favor of large entrenched interests.”
Small business organizations are not giving up. They are working with members of both parties on Capitol Hill to revive the legislation. Senators Bingaman and Thomas have indicated their willingness to reintroduce their bill, and Representatives Nydia Velazquez (D-NY) and Steve Chabot (R-OH), Chairperson and Ranking Member of the House Small Business Committee respectively, have indicated their eagerness to find sponsors on the House Ways and Means Committee. The Coalition Supporting Equity for our Nation’s Self-Employed has sent a letter to all members of the 110th Congress, and is hopeful that there might be new legislation introduced by the summer.
John Arensmeyer is Founder and CEO of Small Business Majority, a national small business advocacy organization.
