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Top Tax Changes For The Self-Employed

Jan 06, 2012

Prior to preparing 2011 tax forms, the self-employed and micro-businesses (fewer than 10 employees) should be aware of a number of tax law changes, but also must stay focused and connected for new changes that are inevitable during 2012. As always, stay tuned to the NASE for the most recent updates!

The following tax law changes relate to 2011 returns:

  • Self-Employed Health Insurance Deduction – Unfortunately, the payments that small-business owners make for health insurance premiums for themselves and their families won’t be as tax beneficial for 2011 tax returns as they were for 2010.  The premiums paid for health insurance by the small-business owner will be still be deductible on page one of form 1040, 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 13.3% tax hike on the small-business owner.  The NASE is committed to eliminating this inequity and restoring this deduction.  Check out NASE.org for more updates from time to time.  
  • Payroll Tax Cut for 2011 – Beginning January 1, 2011, the employee’s part of the OASDI portion of Social Security tax was decreased from 6.2% to 4.2%, on the first $106,800 paid to each employee. For the small-business owner, the OASDI portion of Self Employment Tax was decreased from 12.4% to 10.4% which was a significant benefit.  The impact for the small-business owner will be included on Schedule SE and means up $2,000 in lower taxes for all working Americans. 
  • Payroll Tax Cut for 2012 – The payroll tax cut for 2011 was expected to last only for one year, however, the cut has been extended for the first two months of 2012.  The debate in Washington continues to be heavy on this subject and there is a good chance the tax cut could be extended even further.  Small-business owners will need to keep track of these changes since either an extension or expiration will still require additional paper work and diligence to remain in compliance. Bookmark NASE.org to stay up to date on progress related to this important tax issue.  
  • Reporting of Employer Provided Health Care – The Affordable Cart Act which was passed in 2010 required that employers begin reporting the cost of coverage under an employer-sponsored group health plan.  That reporting was originally required beginning on January 1, 2011 so that business owners would have to report those amounts for the year just ended.  The good news is that more time has been granted.  The reporting for 2011 is now voluntary for all employers and optional for 2012 for those employers with less than 250 employees.  Go to NASE.org and check out Notice 2012-9, issued Jan. 3, 2012 for more detail.
  • Increase in Maximum Section 179 Deduction – The Small Business Jobs Act of 2010 increased the maximum allowable deduction under Code Section 179 from $250,000 to $500,000 for tax years beginning in 2010 and in 2011.  This provision provides additional incentive for small businesses who invest in new equipment for both years. At the same time, the limit for the phase out of the deduction was increased to $2,000,000 from $800,000.
  • Standard Mileage Rates Adjusted for 2011 – Business owners using their vehicle for company business can deduct 51 cents per mile driven on their 2011 tax return. The rate has also been set for 2012 at 55.5 cents per mile. The rate for medical miles driven was 19 cents per mile for 2011 and 23 cents per mile for 2012, while charitable miles use the rate of 14 cents per mile for both years.  
  • Contribution Limits for IRAs and Other Retirement Plans - Where an IRA contributor who is not covered by a workplace retirement plan is married to someone who is covered, the deduction is phased out if the couple’s income is between $169,000 and $179,000.
  • AMT Exemption Increased for 2011 – For tax year 2011, the Alternative Minimum Tax 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. The AMT exemptions are currently schedule to decrease to year 2000 levels to $45,000 for a married couple and only $33,750 for a single taxpayer.  The NASE is working diligently to keep the exemption levels from decreasing for 2012.  Go to NASE.org to keep track of this important process.  
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