Jessica Pfenning on February 4, 2015
How the PPACA Affects Payroll
The Patient Protection and Affordable Care Act (PPACA) of 2010 was the biggest healthcare reform since 1965 and has resulted in big changes for businesses. Besides altering the way that employers provide their employees with healthcare, it’s also changed certain aspects of financial record keeping. As a result, it’s important to stay on top of these changes to ensure that your business remains compliant in the future. Here are some specific ways that the PPACA affects payroll.
Medicare Payroll Tax
For individuals earning more than $200,000 annually, there has been an increase in their payroll tax. Although there was a Medicare payroll tax of 1.45 percent in the past, the PPACA has resulted in a new surtax for some employees. This means that high-income earners must now pay 2.35 percent when their wages are higher than $200,000. The interesting thing about this is that the increase in payroll tax doesn’t actually contribute to Medicare, but simply covers the PPACA’s expansion.
Increased Tax on High-Income Earners
While normal Medicare tax on most employees is 2.9 percent, there is now an added 0.9 percent tax on wages exceeding $200,000 for individuals who are single or head of the household and $250,000 for those who are married and filing jointly. This means that these high-income employees now pay a grand total of 3.8 percent. Consequently, you are now responsible for withholding the extra 0.9 percent for qualifying employees.
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Health Insurance Coverage Aggregation for W-2 Reporting
Although it won’t impact smaller businesses, the PPACA will affect payroll reporting for employers who file 250 or more W-2 forms each year. Under the new system, employee sponsored health coverage for the following items must be aggregated when filing this volume of forms:
- Major medical coverage
- Domestic partner coverage included in gross income
- Hospital and indemnity or specified illness paid through salary reduction or by employers
- Health flexible spending accounts in excess of employee’s cafeteria salary reductions for all qualified benefits.
If you charge a COBRA premium, then you must also aggregate:
- Employee assistance plans providing employer sponsored healthcare coverage
- Employee sponsored wellness programs
- On-site medical clinics provided by employers
The amount that you report should cover your portion as an employer and whatever your employees pay for one lump sum.
Regardless of your stance on this healthcare reform, there’s no denying the impact it’s had on business owners and employees. While the changes to payroll aren’t necessarily monumental and primarily impact larger companies, you will still want to be aware of how the PPACA affects payroll taxes and reporting. It’s also important to stay updated on this and similar laws and regulations that can influence your business and the way you handle taxes.