House Committee on Ways and Means


As proposals for stimulating the nation

Statement of the National Association for the Self-Employed

As proposals for stimulating the nation’s sagging economy are debated, the National Association for the Self-Employed (NASE) and our 250,000 members businesses, representing over 600,000 employers and employees and self-employed individuals, would like to clearly convey that significant reforms to revitalize our nation’s micro-businesses, the lifeblood of America’s economy, must be included in an economic stimulus plan in order to jump start our ailing economy. 

The historic economic contribution of micro-businesses cannot be overstated in this dialogue.  Today, this segment represents more than 18 million self-employed individuals and owners of micro-business firms that -- in the past few decades in particular -- have leveraged size, flexibility and entrepreneurship to ignite what has arguably been the most remarkable era of innovation and growth in our nation’s history.  In fact, firms with fewer than 10 employees created well over a third of all new jobs to the economy between 1998 and 1999, and the last U.S. Census reported that these firms employ more than 12.3 million workers with a total annual payroll of more than $309.7 billion. 

Beyond these tangible contributions, it’s also important to note that in a period marked by corporate scandals and uncertainty, “Main Street” businesses remain a bright example of solid American virtues and values.  According to a recent poll by USA TODAY, CNN and Gallup, Americans rate people who own small businesses as the second most trustworthy group in the nation, right behind teachers.   

The NASE is pleased to see income tax rate reductions and an increase in business equipment expensing in the forefront of many of the stimulus proposals.  However, we firmly believe that these plans do no go far enough in addressing some of the key issues that create a drag on growth for the self-employed and micro-businesses. In working with many of the nation’s self-employed, I see several key issues and measures that are critical to getting micro-businesses back in position to help revive the economy. The NASE proposes a Micro-Business Stimulus Plan, which includes:

Increase in Business Equipment Expensing

The NASE proposes an increase of the deductible for business equipment expenses. Section 179 of the Internal Revenue Code should be amended to increase the amount of equipment purchases that small businesses may expense each year from the current $25,000 to $40,000. This change will eliminate the burdensome record keeping involved in depreciating such equipment and free up capital for small businesses to grow and create jobs. Also increases the phase-out limitation for equipment expensing from the current $200,000 to $400,000, thereby expanding the type of equipment that can qualify for expensing treatment. This limitation along with the annual expensing amount should be indexed for inflation in any proposed legislation.

Section 179 should also be amended to permit expensing in the year that the property is purchased or the year that the property is placed in service, whichever is earlier. This will eliminate the difficulty that many small firms have encountered when investing in new equipment in one tax year (e.g., 2001) that cannot be placed in service until the following year (e.g., 2002).

Independent Contractor Status Clarification

The IRS’ lack of clarity in defining “independent contractor” versus “employee” for tax purposes has presented major difficulties for micro-business owners, costing owners more than $750 million in IRS fines and back-taxes over the past 10 years.  The NASE proposes that legislation for a micro-business stimulus package include all the provisions of the Independent Contractor Determination Act of 2001 (S. 837, H.R.1783) previously introduced in the 107th Congress.

Key provisions would create new worker-classification rules and would prohibit the IRS from reclassifying independent contractors as employees if employers have a reasonable basis for its treatment of workers as independent contractors.

One-time Payroll Tax Cut

Currently, the payroll tax is 12.4% for Social Security and 2.9% for Medicare, for a total of 15.3%, divided equally between employee and employer. Four of five taxpayers now pay more in payroll taxes than income taxes. Some taxpayers do not necessarily realize it because their employers pay half of the payroll tax.  However, the self-employed are required to pay both the employer and employee share of payroll taxes, leaving them with a continuously increasing tax burden.  The Congressional Budget Office has estimated that the 10% of taxpayers making $100,000 or more this year will pay 64% of all income taxes and 31% of payroll taxes. By contrast, the 62% of households earning $50,000 or less will pay just 7% of income taxes but 30% of payroll taxes.

A payroll tax cut would give the economy a powerful shot in the arm because the benefits are spread so widely. The NASE proposes a refund to employees and employers in micro-businesses with 10 or less employees, also including the self-employed, on the payroll taxes they paid in 2001 on the first $10,000 of each employee’s or self-employed individual’s earnings.

Home Office Tax Deduction Simplification

With the rise in home-based businesses, tax deductions for home offices are an important benefit for self-employed individuals and micro-businesses.  The NASE proposes a new $2,500 tax deduction for home-based small-business operators, which will greatly simplify their tax filing process.  This amount represents the average amount taken by home office tax filers each year. Additionally, legislation should repeal tax code provisions that require homeowners to "recapture" their depreciation when they sell their homes. These current tax provisions prevent home based business owners from taking full advantage of capital gains tax exclusions, which exempt $250,000 ($500,000 for married couples) on the gain of the sale of a primary residence.

Self-Employment Tax Relief on Health Insurance Premiums

Current tax codes related to health insurance premiums deliver another whammy that is unique to the self-employed.  Under present tax laws, corporations are able to deduct health insurance premiums as a business expense and to forego FICA (Social Security and Medicare) taxes.  In contrast, the self-employed are not allowed to deduct premiums as a business expense and thus, are required to pay an additional 15.3 percent self-employment tax on these expenses.  These additional costs are a chief reason why the working self-employed and their families comprise 62 percent of the 43 million Americans who are without health insurance.

Scheduled to phase in this year is 100% deductibility of health insurance premiums for the self-employed.  However, this does not solve the tax inequity.  One hundred percent (100%) deductibility of health insurance premiums for the self-employed relates to income tax and not self-employment tax.  The self-employed are required to pay two types of taxes on their returns: income tax and self-employment tax. 

The current inequity in the Internal Revenue Code as it relates to the self-employed and their health insurance premiums must be corrected. To achieve tax equity between all forms of business entities, the self-employed must receive exclusion of health insurance premiums from self-employment tax regardless of the entity form under which they choose to operate. The NASE proposes the following options to achieve equity:

  1. Internal Revenue Code Sec. 162(l)(4) Code Sec. 1402(a) currently excludes the self-employed health insurance deduction from net earnings from self-employment.  If these code sections were eliminated then health insurance premiums would be a deduction for purposes of computing the self-employment tax while leaving the self-employed deduction for insurance premiums as an above the line deduction on Form 1040.  Alternatively, a line item deduction for the same amount as the self-employed insurance deduction on page 1 of 1040 could be added to Schedule SE.
  2. Health insurance premiums of the self-employed could be deductible on Schedule C or E as an ordinary and necessary business expense rather than the deduction above the line on Form 1040.
  3. The group health insurance benefit provisions of the Internal Revenue Code could be expanded to include individuals who have “earned income” and/or the provisions of IRC Section 105 (medical reimbursement plans) could be expanded to include self-employed owners. This change would have the effect of making the insurance premiums deductible at the entity level (Schedule C, Form 1065 or Form 1120S) thus eliminating the need for the self-employed insurance deduction on page 1 of 1040 or on Schedule SE.

Health Care Tax Credits

With eight out of ten uninsured Americans in working families, our nation stands in desperate need of strategies to address the needs of the working uninsured.  One place to start is in the micro-business and self-employed communities.  Almost 100% of large firms offer health insurance.  But for small employers, that number is cut in half and the self-employed continue to find it a daunting task to gain access to affordable health coverage.

The NASE proposes that micro-businesses (C corporations) with ten or less employees receive a 50% tax credit, up to $2000 per individual policy, and $5000 per family, for purchasing health coverage for themselves and their employees. Sole-proprietors (Schedule C filers) and partners in partnerships with earned income and 2% owners in S Corporations (Schedule E filers) should receive a pre-payable, fully refundable tax credit towards the purchase of health insurance.  The credit would be $1,000 for individuals, $2,000 for married couples and $500 per dependent up to $3,000 per family, plus 50 percent of any additional premiums to assist those with higher costs. 

Conclusion

Again, the NASE would like to restate our support for specific proposals in the Administration’s economic growth plan.  However, we feel more needs to be done to result in true growth of our waning economy.  We also strongly feel that economic growth can only be spurred if the issue of access to affordable health coverage is addressed.  Any infusion of funds received by growth provisions will go directly into alleviating micro-business owner’s current health care burden rather than being reinvested in their business for the purposes of expansion and growth.

The NASE believes that micro-businesses and the self-employed have been pillars of innovation, integrity and reliability, fueling much of what is great about America.  Finding solutions that provide a more equitable shake for these enterprises not only is in the best interest of this important segment of the small business population; it’s in the best interests of our nation and its economy, as well.