Wednesday, March 13, 2013

Why a $2,000 Employer Penalty is Really $3,046

Under the ACA, employers not offering health insurance will owe a $2,000 per employee "shared responsibility" penalty (unless the employer has fewer than 50 FTEs). This penalty is not deductible from business taxes, and thereby is equivalent from an employer's point of view to a $3,046 wage cut.

When an employer cuts wages by $3,046, he reduces his payroll expenses by $3,279, which includes the payroll tax he would have owed on the $3,046.

Payroll expenses are deductible, so by cutting his payroll expenses by $3,279, he increases his corporate tax by 39 percent of that = $1,279. So net of corporate tax this wage cut saves him $2,000, which is just enough to pay the $2,000 penalty.

Unless an employee (or employees like him) has opportunities to take a job at an employer who does not pay a penalty, he can expect the $2,000 penalty to ultimately depress his wages by $3,046.

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