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INDIANOLA, Iowa (DTN) -- If you reimbursed an employee for individual health care costs, received a crop insurance indemnity payment, traded commodity options this year or had a lot of repair bills, your 2014 taxes just got more complicated.
That doesn't even count the anxiety Congress caused by not extending the $500,000 section 179 expense deduction limit until the 11th hour. The House of Representatives on Wednesday passed a bill to extend the higher expense limit for 2014. The bill now goes to the Senate and if it passes (which tax experts expect), the president will likely sign it next week.
Meanwhile, if you don't offer employees group health care coverage and instead paid for your employees' individual health insurance premiums or reimbursed their medical costs, stop doing that, tax experts advised. That generosity could backfire on small employers.
A Department of Labor and Treasury memo issued Sept. 13 surprised many CPAs by imposing onerous fines on the practice. Most tax professionals had wrongly assumed the income would be taxable to employees and employers, but not subject to $100/day fines per employee under the Affordable Care Act. The government decided differently. (For details see http://www.dol.gov/…).
Unless your health payment re-imbursement falls under three exempt categories: (1) only a one-employee health plan; (2) an employer-provided group insurance plan; or (3) you only reimbursed costs for "ancillary benefits" such as dental, vision, or long-term care premiums, IRS says you may be subject to a penalty of as much as $100/day per employee under the Affordable Care Act.
REMEDY FOR IMPROPER HEALTH REIMBURSEMENT
Before you fill out your employees' 2014 W-2s, be sure to consult your tax adviser, said Paul Neiffer, a CPA and tax principal with CliftonLarsonAllen. If you take actions to amend the practice within 30 days of becoming aware of the Department of Labor guidance, you may be exempted from the penalties.
The money you paid still should be considered taxable earned income. Your employees will have to cover their own insurance premium and other health costs.
The increase in taxes is not insignificant, Neiffer added. Assume a farmer pays $10,000 for his employee's health insurance. For 2013, the farmer could deduct these premiums and the employee paid no tax on the benefit. Beginning this year (assuming it is not a qualified group plan), by adding that amount to the employee's paycheck, the employer and employee will each incur $765 of payroll taxes and the employee will owe $1,500 or more of income tax.
Small employers are really left with only two choices to assist employees with their health care costs, CPAs tell DTN. Either they provide group health insurance or they increase taxable compensation without any connection to the employee's out-of-pocket health care costs.
"That is certainly a change for a lot of farm employers," said Brad Palen, CPA with Kennedy & Coe in Salina, Kan. "Our farm clients have had to go to their employees and say, 'We used to be able to pay your health insurance premium, as a non-taxable benefit. We can't do that anymore, so we'll pay you more in taxable income and you'll have to pay your own insurance premium.' Qualified group plans aren't affected. But fewer farm employers have those because they are more expensive," Palen explained.
DIG INTO CROP INSURANCE