The New Health Care Law’s Impact on Small Businesses

The way a business is structured in 2013 could determine its status under the Affordable Care Act (sometimes called “Obamacare” or the ACA) in 2014.  Starting in 2014, a company with 50 or more full-time employees is required to provide affordable health insurance to employees or pay substantial penalties.  The fine, imposed by Section 4980H of the Internal Revenue Code, varies depending on the employer’s circumstances, but it is generally $2,000 per full-time employee in excess of the first 30 full-time employees.  Thus, a business with 100 full-time employees that fails to offer them health insurance would face a fine of (100 – 30) x $2,000, or $140,000.

Some business owners lack knowledge of what the ACA requires of them.  Other, more sophisticated businesses that have studied the ACA and wish to expand their workforces may begin hiring independent contractors, who will not count toward the business’s employee total.  Determining whether an employer has 50 employees for 2014 and is potentially subject to a fine depends on how many employees that employer had in 2013; thus, employers may begin adjusting their workforces in 2013 to prepare for the following year.

In recent years, employers have relied heavily on independent contractors.  Data indicates that the percentage of businesses’ workers who are non-employees nearly doubled over the last five years.  While this is probably due in large part to the recession and employers’ desire to trim labor costs, it may also be partially attributable to the new health care law.

The IRS has indicated that it will be scrutinizing businesses that try to label their employees as independent contractors.  This has always been an issue, as businesses have incentives (such as reduced payroll taxes) to use independent contractors.  But with the new health care law, employers have an even greater incentive, and the IRS accordingly will increase its vigilance.  Further complicating matters is that the IRS relies on a vague “facts and circumstances” test in distinguishing between an employee and independent contractor.  Some factors considered under the test include are an employer’s level of control over the worker and how permanent the worker’s position is within the business.