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A Sick System
It is nearly impossible to acquire health insurance as an entrepreneur in some states.

February 1, 2007

As someone who owns a small business, it is hard not be supremely irked when any politician starts talking about health insurance, taxes and the average small business owner. Whether small business owners "make America great," "provide the backbone of American commerce," or "keep America strong," the politicians who praise business owners are the same politicians who make entrepreneurs' lives miserable through the perpetuation of two separate but equally broken systems: the American health care system, and the Internal Revenue Code. It's nothing new that an insane labyrinth of arbitrary regulations has taken over the country. Our last tax major reform was in 1986, and the health care picture has changed significantly since then. All that's new is President Bush's plan to make it even worse, by complicating, rather than simplifying, the tax code.

Most small business owners don't open a shop with any idea of all of the forms they'll be filling out—or more likely, that their accountants and payroll companies will be, since they're so complicated. When I started my business, though I sensed that the world of taxation was both murky and oft-hated by those older than myself, I had no idea why. Eight years later, I know very, very well.

Even when your business is off the ground, the tax agencies don't tell you what you're required to file. You're just supposed to know, by reading thousands of pages of IRS publications. When our lawyer, a family friend, sat down to explain the difference between an S Corporation, a C Corporation, and a Limited Liability Company, the topic of benefits didn't even come up, though plenty of other arcane tax regulations did. Then, in 1999, my right lung collapsed. Though my hospital stay only lasted for a few days, something more profound happened without my even knowing it: my insurance profile changed. As soon as I escaped the educational system and graduated from college, which had kept me guarded as a dependent under my parents' health insurance plan, I was officially uninsurable as an individual.

In a limited sense, I was lucky that I had gone to college in Massachusetts, where I remained for a year following graduation. State law proclaimed that businesses only needed a single employee to qualify for group coverage, so I could bypass the medical history and qualify for insurance. Unfortunately, I also had the honor of paying the Massachusetts Corporate Excise Tax—a minimum of $456, regardless of revenue, profit, or how long you had been in the state. S corporations (i.e. small businesses) incorporated outside the state reported this imperturbable tax on a twenty-page-long form, coincidentally used for companies incorporated inside the state with revenues greater than $6 million.

In Texas, where I set up shop next, it took two employees to form a group. After my temporary individual health plan (which also avoided a medical history) expired, the only individual policy I could find required me to sign a waiver that would exclude major organs from health care coverage for the rest of my life. I had to move to a different state.

I chose California. Even though it also required two employees to form a group, I was able to find someone I wanted to work with in short order, and I was only uninsured for a month. Together, we formed a two-person group. The catch was that our combined monthly premium, including dental coverage, came out to more than $560.00.

To make matters worse, our family lawyer had omitted an explanation about a minute but key portion of the tax code when discussing the disadvantages of S Corporations. Shareholders who own more than 2% of the company are required to report their group health insurance premiums not as expenses—and are they ever expensive—but as wages. Not just any wages, though: wages taxable for the purposes of federal withholding, but not for Social Security or Medicare. These shareholders have different wages for different types of taxes, and are then instructed to take the Self-Employment Health Care deduction on their personal tax return at the end of the year. Unfortunately, when I started in with health insurance, I didn't know any of this. Neither did my payroll company. All of my taxes and payroll checks were wrong, and years later, I'm still trying to fix them.

The process is mind-numbing. I made the disastrous decision early on to split my health care costs between my company and my employees, myself included, 50-50. My Massachusetts premium was $295.01, leaving the one cent up in the air. My payroll company certainly wasn't able to alternate rounding every other month; it could barely cut checks on time. When I later discovered that my health care costs were really "wages," there came the question of what percentage to count: fifty percent (what the company was really paying for), or the whole thing (what the company was cutting checks for)? Could I deduct my share from my paycheck before taxes? The IRS didn't know the answer to the first question when I called repeatedly, and my payroll company said "yes" to the second, so long as I called the deduction "Section 125" on my W-2. As it turns out, the payroll company was wrong. According to U.S. Code Title 26 , Subtitle A, Chapter 1, Subchapter S, Part I, § 1361, I'm not an employee of my own company, so I couldn't participate in a Section 125 plan, even if I had one.

At this point, very little was clear to me except that in addition to the staggering monetary cost of health care, there was another cost: the time spent figuring out how to tell the government that I merely had health care. Even more infuriating was the fact that the only entrepreneurs who had to worry were those like me, gullible enough to actually believe that running an S Corporation conveyed special "benefits" (as the IRS refers to them) to small business owners.

Right now, the law punishes small businesses for having insurance, even if they get to deduct the madness away in the end. When you also take into account the punishment that insurance providers mete out through their rates, and the punishment financial "experts" dole out on a regular basis through fees and frequently wrong advice (not that it's always their fault; the system is unfathomably complicated), not to mention the punishment tax agencies inflict on business owners through incomprehensible forms, automated systems, letters and fines, it's nothing short of a miracle that anyone would ever want to start a business in this country.

Aaron Greenspan is the CEO of Think Computer Corporation and author of Authoritas: One Student's Harvard Admissions and the Founding of the Facebook Era. He is the creator of the FaceCash mobile payment system, ThinkLink business management system, and PlainSite legal transparency project.

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H. Elwood Gilliland III (www.gudagi.com)
May 5, 2008 at 8:27 PM DT

Yes, the "redundancy factor" -- that you are an owner and not an employee. Ridiculous, because an owner is certainly employed (working) for one-self. Worse, the tax code is now coagulating near the freelancer -- which means what was once unregulated is now under the scrutiny of IRS, politicians and the like arguing that the American worker is being "bamboozled" by the self-employed. Except, wait, doesn't the American worker get tons of benefits, tax incentives, refunds, employee-related withholdings, special bonuses, and the illusion of "job security", while the self-employed ride solely on their shoot-from-the-hip independence? Oh, wait, I forgot -- the Declaration of Independence was around way before the IRS, and therefore, it's null and void. Just ask the 1907 senators who voted down the Internal Revenue code! Only later to be circumvented by modern politically-enabled-corporate-banker-elites (white power).

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