By Stephanie Breedlove, Breedlove & Associates
The Patient Protection and Affordable Care Act (PPACA) has made many changes to the health insurance system. One of the primary goals is to help millions of Americans obtain coverage. Starting October 1, you will have access to your state’s online health insurance exchange, which will provide a marketplace where you can compare plans to find a policy that suits your individual needs. Beginning January 1, 2014, you will need to have health insurance or face a fine.
This may sound like a lot to deal with if you don’t currently have health insurance or are unhappy with the coverage you have, but if the family you work for is willing to help you out, it can benefit both parties. The reason is because health insurance contributions aren’t considered taxable compensation to you or the family so neither party has any taxes on that portion of the compensation. Additionally, the IRS provides a special tax credit for employers that contribute to their nanny’s health insurance.
In order for the family to qualify for the tax credit, you cannot earn more than $50,000 per year and the family has to pay for at least half of your health insurance premiums. If both of those criteria are met, the family can take a tax credit of up to 35% on each dollar they contribute – and in 2014, the tax credit will increase to 50%.
Here is an example to illustrate the benefits for both you and the family:
Pam is currently paid $30,000 in taxable wages. After taxes, her “take-home” pay is about $26,000. She is considering a health insurance policy with premiums of $250 per month ($3,000 per year). But that would reduce her disposable income to $23,000 and she doesn’t feel like she cannot afford it.
So Pam discusses health insurance with her family. Since she’ll have to be covered next year and she’s up for a raise anyway, the family opts to pay for Pamela’s health insurance premiums. Neither Pamela nor the family has any additional taxes on the $3,000 the family contributes. Plus, the family will get about $1,000 back through the Health Insurance Tax Credit. Now, the $3,000 health insurance plan has an after-tax cost of $2,000. And next year, the savings will be even higher when the family’s tax credit percentage increases.
By contrast, if the family had bumped Pam’s compensation by $3,000 so she could afford insurance, the plan would actually cost Pam an additional $500 in taxes and the family would pay an additional $300 in employer taxes. Structured this way, the health insurance premiums would have an after-tax cost of $3,800 per year ($3,000 + $500 in employee taxes + $300 in employer taxes).
As you can see, simply understanding this small tax incentive saves the family $1,800 and helps Pam obtain a great health insurance policy.
Even if you end up meeting your family halfway on health insurance, it’s still beneficial to both parties as long as you structure payroll correctly. If you or your family has any questions, just give us a call or visit our state-specific nanny tax pages. We’re here to help!