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Washington Watch - January 25, 2012

NASE Response To State Of The Union  

Last night, President Barack Obama gave his State of the Union address before Congress, introducing plans for job growth through manufacturing and clean energy, as well as calls for members of Congress to work together to pass the payroll tax deduction and other legislation. Katie Vlietstra, Director of Government Affairs for the NASE, commented on the President’s speech:

"The overall tone of the speech was positive. The NASE supports efforts to expand the payroll tax cuts to all Americans and level the tax playing field for all Americans. However, we were disappointed that the President did not spend more time highlighting the importance of small businesses and their direct role in spurring economic recovery efforts.  We would have hoped for a more ambitious agenda in outlining future policies that can continue to support the country’s small businesses. Additionally, considering it is an election year, it seems that bipartisan work will be difficult to achieve. Moving forward with the priorities of the Administration or Congress seems awfully unlikely in this climate.”

Fast Facts: The Self-Employed Agenda

The nation’s 22 million self-employed are starting and building businesses and contributing to the economic turnaround.  But they’re struggling not just with the economic challenges we all face, but also with a disproportionate tax burden and excessive paperwork requirements.  The changes required to address these challenges aren’t necessarily difficult – but they are vital to the continued success of the self-employed sector of the economy.

The NASE's Self-Employed Agenda for 2012 includes the following:

Item: Self-Employed Health Insurance Deduction - The premiums paid for health insurance by the small-business owner will still be deductible on page one of form 1040 in 2011, but unlike 2010, those same premiums will not be included on Schedule SE, Self Employment Tax. That means net earnings from self-employment will be higher and the related Self Employment Tax will be higher. This is in effect a 15.3% tax hike on the small-business owner. 

  • Action: The self-employed need this deduction extended or made permanent to avoid the dramatic increase in tax burden that will otherwise take effect. 
Item: Payroll Tax Relief Extension - The payroll tax cut for 2011 expires at the end of February 2012. 
  • Action: Small and micro-businesses, who pay both the employer and employee version of the payroll tax, need relief to be extended for the full year to ensure they can continue to grow and contribute to overall economic improvement. 
Item: Standard Home Office Deduction - Entrepreneurs managing businesses out of their home face added burdens at tax time. The current home office deduction has the words “See Instructions” over 10 times on a one-page form. Bipartisan legislation has been introduced in Congress to allow business owners the option of a $1,500 standard deduction, but would not preclude taxpayers currently qualifying for the home office deduction from continuing to itemize their expenses should they choose.
  • Action: More than half of the self-employed work from an office at home, so Congress should pass and the President should sign legislation simplifying the deduction.

Item: Tax Deduction for Startups - Passed as part of the Small Business Jobs Act of 2010, this provision allowed individuals to take a $10,000 deduction for start-ups in 2011. In 2012, the deduction will decrease to $5,000.

  • Action: Maintaining the current level for this deduction is vital to encouraging individuals to continue to start new companies and contribute to the growth of our economy. 
Item: Alternative Minimum Tax (AMT) Exemption - For tax year 2011, the AMT exemption for a married couple filing a joint return is $74,450 and $48,450 for single filers, representing a $2,000 and $1,000 increase, respectively. For tax year 2012, the AMT exemptions are currently scheduled to decrease to year 2000 levels to $45,000 for a married couple and only $33,750 for a single taxpayer. 
  • Action: Small and micro-businesses need this exemption to remain at 2011 levels to ensure the self-employed are not unfairly singled out for higher taxes by this reduction in the exemption.
We all know 2012 is a pivotal year for the economy – and for the politicians who help shape policies designed to boost growth.  If our elected leaders are concerned about keeping their jobs into 2013, they should focus on the tax policies the self-employed need to keep growing their businesses in 2012.

New Program For Biz Owners Using Independent Contractors

The NASE knows that the classification of independent contractors and employees has been confusing micro-businesses for years. If your business has inappropriately classified employees as independent contractors and therefore failed to withhold and pay applicable taxes the IRS is most likely looking for you.  

But there is good news. The IRS has developed The Voluntary Classification Settlement Program (VCSP) in order to provide an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods.  For those of us who weren’t aware of the rules, this is a great chance to get things right, and most likely avoid penalties and interest that might otherwise be due.  The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers.  The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.

Taxpayers file an application (Form 8952) to start the process. With acceptance, businesses pay just 10% of the tax computed on favorable rates. There are no penalties or interest for misfiling for past years. There is also audit protection for past years on workers being reclassified.  The most confusing part of this issue is exactly who is an independent contractor and how far back can the IRS go if you have made an error.  The VCSP, according to the IRS, removes the uncertainty for Federal Employment Tax purposes and potentially limits the exposure from previous years.

Easy Process:
Business owners should complete Form 8952, Application for Voluntary Classification Settlement Program, and file 60 days prior to treating workers as employees. At that point, the IRS will review the application and, if eligible, a closing agreement will be prepared by the IRS. Business owners should send payment after the closing agreement is received.

Eligible businesses:

  • Must be currently treating workers as nonemployers
  • Must have filed 1099s for nonemployees
  • Cannot be under audit
  • Can be tax-exempt organizations or government entities
  • Agree to extend the Statute of Limitations
If you are not sure or you know that you have made an incorrect classification, the VCSP may be a good thing for you.  Have questions? NASE Members can refer questions to our CPAs and small business tax professionals here.

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