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Doctors, Sole Proprietors and ObamaCare Taxes

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On the Self-Employment Tax

By Perry D’Alessio CPA

perry-dalessio-cpaA sole proprietor is an individual business owner [medical practice] physician-executive whose business [practice] is accounted for on a separate schedule of the owner’s individual income tax return.

Typically, owners filing their business returns via the use of Schedule C of Form 1040 have the lowest level of reporting requirements and also (in general) do the poorest job of keeping good records of business activity.

There is only one level of tax for the sole proprietor. The net profit (or loss) from the Schedule C business is reported on page one of Form 1040 and is combined with all of the other income items reported to arrive at gross income.

Different from interest and dividend income, or investment income that is typically considered passive in nature, self-employment income is income considered to be generated by ones’ own actions.

Self Employment Tax

There is “Self Employment” tax to be paid on virtually all self-employment income reported in the tax return.  Many sole proprietors get into trouble because they neglect to take this tax into account when estimating their tax liability for the year and this tax is significant as noted below.

How SET Works

Self-employment tax is paid on 92.35 percent of all self-employment net profits.  This tax is the equivalent of the combination of the employer’s and employee’s Social Security tax and Medicare tax.  Social Security tax is 12.4 percent of the first $117,000 (in 2014) in net income and Medicare tax is paid 2.90 percent of net income without any upper income limit. There is also no maximum for the .9% additional Medicare tax under the PP-ACA [Obamacare] that applies when adjusted gross income exceeds $250,000 for joint filers, $200,000 for single filers, or $125,000 on married-filing-separate returns.


Social Security Limit

The Social Security income limit is indexed and adjusted (upward) annually.  The sole proprietor is allowed to deduct one half of the self-employment tax against income; however, this deduction is worth far less than the actual tax.



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15 Responses

  1. Epic Obamacare Fail

    Did RAND’s inflated savings projections condemn Obamacare?

    Let’s not look at the failure of Obamacare as a downturn in healthcare reform. Let’s call it rock bottom – at best, a level, parasite-free foundation on which to build something more true.

    It’s not like we weren’t warned. On December 6, 2013, Leigh Ann Caldwell, writing for CNN, posted “GOP repeal efforts go silent as Obamacare ‘suicide’ plays out.”


    Explaining why Republicans stopped pushing for repeal, Michael Tanner, a senior fellow working on health care at the libertarian Cato Institute, tells CNN: “Never interfere when your opponent is committing suicide.”

    Just as Tanner predicted, two weeks later The Wall Street Journal announced that Obamacare has been repealed – seemingly by default. WSJ: “Mr. Obama is doing through executive fiat what Republicans shut down the government to get him to do.” (See: “Obama Repeals ObamaCare – Under pressure from Senate Democrats, the President partly suspends the individual mandate,” The Wall Street Journal, Review & Outlook Opinion, December 20, 2013).


    The WSJ suggests that that the White House “panicked,” and that the botched rollout could actually leave more people uninsured in 2014 than in 2013. Yet premiums continue to rise. WSJ continues: “The new political risk that the rules are liable to change at any moment will also be cycled into 2015 premiums. Expect another price spike late next summer.”

    Dear Mr. President,

    Even the most patriotic Americans cannot afford more of your AFFORDABLE CARE. In the interest of a clean start with a more transparent reform, please allow me to show you the mistake which condemned the ACA long before the first American successfully logged on to Healthcare.org: The projections of savings which your administration shopped to Congress, were based on a 2005 RAND study. Am I right? The results were later found to be so shamefully biased in favor of the EHR vendors who financed the study, that even RAND admits it stinks. Am I right? (See “Electronic health records yet to deliver, study finds,” by Reed Abelson and Julie Creswell, January 11, 2013, New York Times).


    More parasites

    Wall Street Journal: “With ObamaCare looking like a loss-making book of business, a public declaration of penance by the insurance industry for helping to sell ObamaCare is long overdue.” That sounds a lot like a demand for transparency. Can you name anyone who pushes ridiculously hard for transparency in dentalcare? Anyone?

    WSJ continues: “ObamaCare’s unpopularity with the public could cost Democrats the Senate in 2014, and a GOP Congress in 2015 could compel the White House to reopen the law and make major changes.” Worth a shot, don’t you think?

    If the nation’s healthcare is to return to traditional insurance – a marginally domesticated fat monster – hopefully this time the effort will be controlled by providers and patients instead of public/private business partnerships; and hopefully unfettered by costly, unproductive mandates that nourishes the public/private partnerships. Let us begin by demanding the FTC hold insurers accountable for anti-trust violations (like every other business in the nation) for the first time in 68 years: Repealing the 1945 McCarran-Ferguson Act is not unlike a long past-due, uninvited deworming. It won’t be pretty.

    D. Kellus Pruitt DDS


  2. Tax ReCap for 2014 OR How to maximize your tax return

    Last year’s Supreme Court decision and Obama’s reelection locked in the following Obamacare tax changes for 2013 and beyond:

    • New 0.9% Medicare surtax on wages and self-employment income: This surtax hits unmarried individuals with wages and/or self-employment income in excess of $200,000 and married joint-filing couples with combined income from wages and/or self-employment above $250,000.

    • New 3.8% Medicare surtax on net investment income: This surtax hits unmarried individuals with positive investment income and modified adjusted gross income (MAGI) above $200,000. Married joint-filing couples will owe it if they have positive investment income and MAGI in excess of $250,000. The surtax only hits the lesser of: (1) your net investment income or (2) the amount of your MAGI in excess of the applicable threshold. Beware: the definition of net investment income is expansive. Among many other things, it includes capital gains, dividends, and the taxable portion of personal residence gains

    • New $2,500 cap on health-care flexible spending accounts: Contributions to your employer’s health-care flexible spending account (FSA) plan are subtracted from your taxable salary. Then you can use the funds to reimburse yourself tax-free to cover qualified out-of-pocket medical expenses. Before 2013 there was no tax-law cap on healthcare FSA contributions, although many employers imposed their own caps. For this year and beyond, there’s a new $2,500 annual cap on healthcare FSA contributions.

    • New stricter limit on itemized medical expense deductions: Before this year, you could claim an itemized deduction for the excess of eligible uninsured medical expenses over 7.5% of your adjusted gross income (AGI). For this year and beyond, the deduction threshold for most folks is raised to 10% of AGI. However if either you or your spouse will be 65 or older as of 12/31/13, the 10%-of-AGI threshold does not take effect until 2017 (the familiar 7.5%-of-AGI threshold will continue to apply to you until that year).

    Happy New Year!



  3. More tax updates

    Well tax season has just started. This is just a quick reminder of some items that may affect you this tax season or into 2014.

    1) Delayed start date for 2014 tax filing season. In October 2013, the IRS said that the start date of the 2014 tax filing season would be delayed past the original Jan. 21, 2014 start date because of the government shutdown. However, at that time, it did not provide a specific delayed start date. It has now done so. Late in 2013, the IRS announced that the start date for the 2014 tax season would be Jan. 31, 2014. But it stressed that the Apr. 15, 2014 due date is not extended. Those unable to meet the deadline can apply for an automatic six-month extension, the IRS noted.

    2) Standard mileage rates down. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) has decreased by 0.5¢ to 56¢ per mile for business travel after 2013. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense also has decreased by 0.5¢ to 23.5¢ per mile for 2014.

    3) Guidance on the new 3.8% surtax on net investment income. The IRS has issued final and proposed regulations on the new 3.8% surtax on net investment income (NII) that first went into effect in 2013. The surtax is 3.8% of the lesser of: (1) NII, or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). The final regulations are voluminous and clarify many aspects of this new tax. They explain, among other items, how NII is calculated, the individuals and entities subject to or excepted from the tax, and the deductions taken into account in figuring the tax. The proposed regulations (upon which taxpayers may rely) provide guidance on the computation of NII with respect to a number of specialized provisions and situations including various payments to partners and former partners.

    4) Guidance on the new additional Medicare tax. The IRS has issued final regulations on the new additional 0.9% Medicare (hospital insurance, or HI) tax that first applies for tax years beginning after 2012. This tax applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). Likewise, the Medicare tax on self-employment income for any tax year beginning after Dec. 31, 2012 is increased by an additional 0.9% on self-employment income which exceeds the same thresholds as apply for employees. The regulations cover many aspects of this new tax including the employer’s withholding requirement, reporting the tax on new Form 8959, and payment of the tax by self-employed individuals who also have employment income, among other items.

    5) Use-it-or-lose-it” rule relaxed for health FSAs. Last fall, the IRS modified the “use-or-lose” rule for health flexible spending arrangements (health FSAs) in order to allow, at the plan sponsor’s option, participating employees to carry over up to $500 of unused amounts remaining at year-end. Previously, any amounts that weren’t used by year-end would be forfeited. The IRS emphasized that the plan sponsor can specify a lower amount as the permissible maximum carryover amount, or it can decide to not allow any carryover at all.

    6) Bankruptcy protection for inherited IRAs. The Supreme Court has agreed to decide whether bankruptcy protection applies to inherited IRAs. There is a conflict among some lower courts as to whether a debtor’s inherited IRA may qualify for an exemption under the bankruptcy laws. Some courts have held that the exemption for retirement funds does not apply to inherited accounts because they are not held for retirement. Other courts disagree, finding that the exemption applies because the funds were originally for retirement of the person from whom they were inherited. Those concerned that the Supreme Court may hold against the exemption may want to explore using trust arrangements for IRA funds to achieve asset protection.

    Bobby Whirley CPA
    Whirley & Associates, LLC + ProActive Advisory
    [Certified Public Accountants]


  4. Sign-up OR Pay-up for medical insurance

    The Affordable Care Act will continue to roll out in 2014, meaning that uninsured individuals have some choices to make that could have tax implications. Enrollment for health insurance under Obamacare, as the health reform act is popularly known, goes through March 31, 2014.

    If you don’t buy an insurance plan, you could face a penalty. The charge for 2014 is either 1 percent of your yearly household income or $95 per uninsured adult and $47.50 per child, up to $285 for a family. You pay whichever amount is higher. If you get insurance for part of the year, your penalty will be prorated. You’ll pay the penalty when you file your 2014 tax return in 2015. If you’re getting a refund, the IRS will subtract your ACA penalty from the amount you were to get back. If your refund isn’t large enough to cover the penalty, the IRS will send you a bill. Ignore that and the tax agency will take the amount out of future tax refunds.



  5. Many Unanswered Questions in Obamacare Enrollment Report

    The Obama administration reports a big jump in sign-ups under Affordable Care Act, but it didn’t break down how many enrollees paid their premiums, how many were previously uninsured and which plans they chose.




  6. TurboTax Maker Linked to ‘Grassroots’ Campaign Against Free, Simple Tax Filing

    Intuit and its allies are continuing to work against proposals for what’s known as return-free filing.


    Ann Miller RN MHA


  7. Court Delivers Major Blow To Obamacare
    [Strikes Down Subsidies]

    A federal appeals court just dealt a potentially major blow to President Obama’s health care law ruling that participants in health exchanges run by the federal government in 34 states are not eligible for tax subsidies, according to USA Today.

    The 2-1 ruling by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit, which is sure to be appealed by the government, threatens the framework of the health care system for about 5 million Americans without employer-provided health plans.



  8. IRS Issues New Instructions for Obamacare

    The IRS has issued new draft instructions, notices and a publication to help taxpayers and tax practitioners deal with the Affordable Care Act.




  9. Provision of Health Insurance and Affordable Care Act Compliance‏

    This year, as with last year, we have been waiting for some clarification on the effects of the Affordable Care Act (ACA) on small business employers. Especially those who have a health reimbursement arrangement. We have not received any further guidance or amendments to the regulations this year.

    Therefore, as we close out 2014, we need to use the regulations which are currently in place.

    The latest guidance issued by the IRS is Notice 2013-54. The ACA impacts YOU; if you are an S-corporation or any business that employs more than One employee and reimburses employees for health insurance premiums or qualified health care expenses.

    The definition of an employee includes the owner of the company.

    Some background: Most small employers do not offer health insurance through a qualified group plan, either because of cost or because they lack enough participating employees to qualify for a group plan. As an alternative, some employers would reimburse employees for the cost of their individual health insurance policies. In addition, some employers could also reimburse employees for their qualified health care expenses (depending upon certain other restrictions).

    With the newly enacted ACA, most believed there would not be any effect on employers with less than 50 employees. However, if you have more than ONE employee we need to be careful. Some penalties in the ACA can lead to fines of up to $100 per day per employee per year ($36,000 per employee.)


    1) S-CORPORATIONS: If you are an S-corporation (Inc or an LLC taxed as an S-corp) and have more than ONE employee;

    a. If you do not have employer provided health insurance,

    i. Do NOT reimburse any employee for health insurance on a pre-tax basis through payroll. The only alternative is to give the employee an increase in taxable compensation to allow them to pay for their own health insurance.

    ii. Do NOT reimburse any employee for health insurance expenses on a pre-tax basis through payroll or otherwise.

    iii. You MAY, as the owner of >2% of the stock, reimburse yourself ONLY or have the company pay directly for your health insurance premiums and follow previous guidance for S-corp Shareholder Health. (i.e. inclusion in your taxable wages on your W2 and reported in Box 14 – you will obtain the appropriate deduction on your personal return – above the line)

    b. If you DO have employer provided health insurance for your employees,

    i. Do NOT reimburse any employee for health care expenses outside of an accountable plan/arrangement set up in conjunction with your health insurance group plan. You must meet certain non-discrimination requirements.

    1. Contact your benefit provider to ensure compliance!

    2) PARTNERSHIP/SOLE PROPRIETOR: If you are an LLC (either taxed as a single member or partnership) and have more than ONE employee;

    a. If you do not have employer provided health insurance,

    i. Do NOT reimburse any employee for health insurance on a pre-tax basis through payroll. The only alternative is to give the employee an increase in taxable compensation to allow them to pay for their own health insurance.

    ii. Do NOT reimburse any employee for health insurance expenses on a pre-tax basis through payroll or otherwise.

    iii. You MAY, as the owner, reimburse yourself ONLY or have the company pay directly for your health insurance premiums. Separately track the premiums paid in your financial statements and provide us with the amount when year-end documents are forwarded for tax prep. (you will obtain the appropriate deduction on your personal return – above the line.)

    b. If you DO have employer provided health insurance for your employees,

    i. Do NOT reimburse any employee for health care expenses outside of an accountable plan/arrangement set up in conjunction with your health insurance group plan. You must meet certain non-discrimination requirements.

    1. Contact your benefit provider to ensure compliance!

    3) C-CORPORATION: If you are an C-corporation (or an LLC taxed as an C-corp) and have more than ONE employee;

    a. If you do not have employer provided health insurance,

    i. Do NOT reimburse any employee for health insurance on a pre-tax basis through payroll. The only alternative is to give the employee an increase in taxable compensation to allow them to pay for their own health insurance.

    ii. Do NOT reimburse any employee for health insurance expenses on a pre-tax basis through payroll or otherwise.

    iii. You MAY, as long as you are receiving taxable compensation reported on a W2 at least to the extent of the amount of the health insurance, reimburse yourself ONLY or have the company pay directly for your health insurance premiums. You do NOT include this reimbursement as compensation to yourself. These reimbursements are deducted on the Corporate income tax return as tax free fringe benefits.

    b. If you DO have employer provided health insurance for your employees,

    i. Do NOT reimburse any employee for health care expenses outside of an accountable plan/arrangement set up in conjunction with your health insurance group plan. You must meet certain non-discrimination requirements.

    1. Contact your benefit provider to ensure compliance!

    MERPS – Medical Reimbursement Plans

    Finally, some of you operate as C-corporations and have in the past provided tax free benefits to yourself and employees by reimbursing medical expenses other than insurance premiums. This type of arrangement was allowed prior to the ACA; if operated under a specific written plan known as a “self-insured medical reimbursement plan” and has always been subject to non-discrimination requirements (if the desire is to preserve a certain amount of deductible expenses.) You were also able to offer a discriminatory health reimbursement arrangement (HRA) as a C-corp owner to only yourself or key employees without being concerned about non-discrimination requirements.

    After the implementation of the ACA, the “self-insured medical reimbursement plans” plans are still subject to non-discrimination to retain favorable tax treatment. BUT the Health Reimbursement Arrangements must be accompanied by a ACA compliant group health insurance policy if you have MORE than ONE employee.

    Please contact us should you have any questions. Please be mindful your Health Insurance agent will need to take an active role in providing a solution.

    Bobby Whirley CPA
    [Managing Partner]
    Whirley & Associates, LLC + ProActive Advisory
    Alpharetta, GA 30009


  10. Purchase Health Insurance

    In 2015, the penalty for not having health insurance increases to the greater of 2 percent of household income or $325. Although enrolling in a plan may be more expensive, the penalty is worth avoiding if you can.

    Individuals receive a subsidy towards their premium if their annual income is less than $46,680 and pay lower premiums and out-of-pocket costs if their income is below $29,175



  11. Tax time

    If you estimated this year’s income wrong when you applied for an ACA health care plan, you may have to pay back part of your subsidy, and if your income is more than 400 percent of the poverty level, you’ll have to pay back all of it. If your income was less than you estimated, you will get a tax credit. Use what you know about this year’s income to estimate next year’s income.

    The tax penalty for not having insurance is $325 per adult or 2 percent of your income, whichever is greater. If you quality for an exception from the requirement, you will need to apply before you file your tax return.



  12. Affordable Care Act Takes Hits in Spending and Tax Bills

    A massive spending and tax-break package approved by Congress Friday will delay several taxes under the Affordable Care Act (ACA) and put a crimp on other healthcare reform outlays. What’s coming to Obama’s desk suspends an ACA tax on medical devices for 2 years. ACA opponents argued that the tax, originally scheduled to take effect in 2016, would stifle medical innovation, increase the cost of care, and eliminate jobs. The legislation also stiff-arms the ACA provision that imposes a 40% excise tax on employer-sponsored health plans deemed ultraexpensive. The start date has been postponed from 2018 to 2020.

    Another casualty is an ACA tax on health insurers, which is suspended for 2017. ACA critics say the tax causes insurers to pass on the cost to consumers in the form of higher premiums. The ACA took other hits on the spending side. Most notably, the legislation prevents the Obama administration from using discretionary funds in the U.S. Department of Health and Human Services to offset any initial losses incurred by health insurers participating in ACA exchanges in the so-called Risk Corridor program.

    Source: Robert Lowes, Medscape News [12/18/15]


  13. Health Law Tax Penalty? I’ll Take It, Millions Say

    The architects of the Affordable Care Act thought they had a blunt instrument to force people — even young and healthy ones — to buy insurance through the law’s online marketplaces: a tax penalty for those who remain uninsured. It has not worked all that well, and that is at least partly to blame for soaring premiums next year on some of the health law’s insurance exchanges.

    The full weight of the penalty will not be felt until April, when those who have avoided buying insurance will face penalties of around $700 a person or more. But even then that might not be enough: For the young and healthy who are badly needed to make the exchanges work, it is sometimes cheaper to pay the Internal Revenue Service than an insurance company charging large premiums, with huge deductibles.

    Source: Robert Pear, New York Times [10/26/16]


  14. Quiet IRS Change Could Affect Obamacare

    Following an executive order from President Trump to “minimize the economic burden” of the Affordable Care Act, the Internal Revenue Service said it is backtracking on its plan to reject 2016 tax returns that do not indicate whether the taxpayer complied with the Act’s individual mandate. Supporters of the act, which is known as Obamacare, fear this behind-the-scenes change could undermine enrollment in health insurance.

    The mandate requires Americans to have a minimum level of health insurance, qualify for one of myriad exemptions, or pay a penalty known as the “individual shared responsibility payment” when they file their return. Taxpayers must indicate on their tax returns whether each person included on the return had insurance for the full year, qualified for an exemption, or owed the penalty. Returns that don’t provide this information are known as silent.

    Source: Kathleen Pender, San Francisco Chronicle [2/14/17]


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