Taxing everyone’s health care benefits seems to be a back in vogue. But it is also a reality for some right now. One of those situations can help us understand the real implications of taxing health care benefits.
Many small businesses are acutely aware of the inequity in the tax code when it comes to health care. A small business that files as an individual entrepreneur, files an individual return. Like you and me, he or she must meet the 7% test. Only health care costs that exceed 7% of adjusted gross income are exempt from taxation. For most people with decent employer sponsored health care, that’s a tough threshold to meet.
For small businesses, it means that the they are paying taxes on the 7% of their income that they pay for health care.
But there is another even more relevant example of wage earners who pay taxes on their benefits. Read the rest of this entry »