Health Care Reform: another way to make employing people illegal

We tend to think of America as an economically free country (#6 rank in one study), but with the proposed health care reform going through Congress it is remarkable how many laws an employer can break by employing his or her fellow Americans.

Suppose that you set up a company and hire 10 childhood friends. You don’t want to skim anything from their paychecks, and your wife has a fat government job, so you decide not to take anything out for yourself. Out of the goodness of your heart you’re going to pay for the office space and do the administrative legwork. When a customer pays, you’ll divide up the check into 10 portions and distribute it immediately to your employees. The employees are getting the absolute maximum long-term pay that they could under this arrangement, taking home 100 percent of the revenue from customers.

What laws are you breaking? At least the following:

  1. you’re not paying for unemployment insurance
  2. you’re not withholding federal income tax
  3. you’re not withholding state income tax
  4. you’re not paying worker’s compensation insurance
  5. you’re not paying the employer’s share of Social Security and Medicare taxes
  6. you’re paying people with a 1099 instead of a W2
  7. though you went to elementary school with these folks, know their mothers, and know for a fact that they were born in the U.S., you didn’t verify to the government’s satisfaction that they were U.S. citizens
  8. (the new one) you’re not arranging health insurance for your 10 friends

One would naively think that an employer who hands over 100 percent of revenue to employees was a kind and generous person, but it turns out that he or she is breaking more laws than a drug dealer.

[You might argue that it is possible for workers to obtain more than 100 percent of customer revenue, minus any materials costs. Government workers get paid without regard to revenue, productivity, achievement, etc. Some workers on Wall Street and at Detroit automakers obtained more than 100 percent of gross profits because they were able to supplement their compensation with tens of billions of taxpayer dollars. However, the average private sector workforce is limited by revenue from customers.]

[I had to delete a lot of comments from people who assumed that if the employer was not withholding income taxes that no income taxes were being paid. In this case, of course, the employees would pay their own income taxes on Schedule C of the Form 1040 (self-employment income). The 1099 filed by the employer would force the employees to report at least that much income on their Schedule C.]

18 Comments

  1. Sam

    August 2, 2009 @ 11:43 am

    1

    Phil, it sounds like you’re not a proponent of adding item #8.

    Are you also actually suggesting that we’d be better off without the first 7, or that they should be gotten rid of?

  2. Chris C.

    August 2, 2009 @ 11:43 am

    2

    What are you arguing in this post?

    a) You believe that employers should not be taxed
    b) You believe that regulations should be simpler
    c) You believe that health insurance should not be paid for by an employer
    d) You are considering becoming a drug dealer to simplify your legal situation

    But, seriously — it is hard to tell if you are arguing against health insurance reform, against this particular instance of reform, or just against regulation and taxation. So I’m curious — in your ideal world, what would the health insurance system look like?

  3. Neal Lester

    August 2, 2009 @ 11:58 am

    3

    Two more:

    You didn’t obtain worker’s compensation insurance (required in all states).

    You didn’t write (and implement) your injury and illness prevention program (required in California and almost a dozen other states). Luckily, you’re unlikely to get caught unless one of your childhood friends files a complaint with OSHA.

    Philip, your series of posts on health care in part inspired me to expand my thoughts on designing a new health care system:

    http://www.3dsafety.com/thoughts-on-healthcare.htm

  4. Aaron Erickson

    August 2, 2009 @ 12:40 pm

    4

    Yes, in the world there are rules. Assuming W2 employment typically means that the employed are *supposed* to be taking fewer risks than you. You, dear entrepreneur, enjoy far higher upside than they do. It means that you have to insure against those risks (unemployment insurance), it means you have to pay and withhold taxes, and it means you have to do a little paperwork to verify they are citizens. Big effing deal – it isn’t that hard, and people do it all the time. Yes, it hurts profitability, but the alternative, not having roads, a military, unemployment insurance, and heatlh care are probably not worth the extra couple points of profitability. I submit that you would be far worse off (profits and otherwise) in a place where you have no good roads, where employees utterly depend on employers with no safety net, and where we go further down the road of health care cost escalation.

    And yes, you might have to arrange health insurance. You are free to pass through whatever you want to them in terms of the cost. What are the alternatives?

    Everyone pays for insurance out of pocket at their option? Given we all bear the cost eventually, or we turn away dying patients at hospital doors, I think it is less than reasonable to have what we have now where people can opt out until they need the insurance.

    I think everyone needs to be mandated to have insurance. I think through the employer system is a piss poor way to do it, but the alternatives of less risk pooling (with individuals being all on their own) and single payer (one very large risk pool) are varying degrees potentially of “less bad”.

    And don’t worry, the drug dealer is probably breaking more laws. I doubt many do 1-7 (last time I checked, they dont offer coverage either) – and they are also *dealing drugs*. Sorry – being a little snarky…

  5. philg

    August 2, 2009 @ 8:49 pm

    5

    Sam: As someone who has periodically started small companies and been overwhelmed with the reams of regulations, I am arguing that these government demands slow economic growth. When writing regulations for employers, the government seems always to assume that the prototypical company is General Electric with hundreds of compliance lawyers and thousands of employees.

    Chris: I do think that health insurance reform that piles more onto the plates of employers is a bad idea. It is tough enough to run a sustainable business in this country and in this economy. The employer should not also have to figure out how to pay for the world’s most expensive health care system.

    Neal: Thanks. I added the workers’ comp regulation.

    Aaron: As I noted in my addendum to the posting, the alternative to the employer not withholding taxes is not “not having roads” or “not having a military”. It is the employees filing their own tax returns based on the 1099 forms provided to them and the IRS by the employer. The tax rate is the same. I think that you’re forgetting that employers have alternatives. They can employ people in China instead of in the U.S. And they seem to be doing just that…

  6. Chris C.

    August 2, 2009 @ 9:18 pm

    6

    I really see two issues here:

    a) how much health care do we, as a society, wish to have as a baseline available to everyone?

    b) how do we pay for this baseline, and make sure we get it at a reasonable price?

    You seem to be saying that “if we have a baseline > 0, then it should not be paid for by employers. They have too much to do already.” I think there are much stronger arguments for why healthcare should not be tied to employment (or dealt with by employers at all), but discussion all of the options is likely to take us down a rathole.

    Instead, let’s assume for a moment that our two choices are (a) employer manages healthcare for employees; and (b) employees manage healthcare for themselves — do you think that pushing managing healthcare expenses from a relatively smaller number of employers to a larger number of employees will _improve_ the system? I think that increasing the number of decision makers dramatically would markedly decrease efficiency. (No, I do not have data to back this up.)

    My main point is this: it is easy to point at any particular healthcare proposal and say it is bad. Healthcare is an expense. For a business owner healthcare is always an expense, and will never generate a monetary profit (outside of the healthcare industry). What is hard is to come up with a concrete proposal which is acceptable to you, and acceptable to others. You sound like you have some strong opinions on this topic — do you have some good ideas for how the system _should_ be?

  7. philg

    August 3, 2009 @ 1:04 am

    7

    Chris: An employer might be an expert on making widgets. Why is he or she an expert on buying health care? I don’t think that companies get great discounts on health insurance. You don’t think that consumers should exercise choice because the market would function less efficiently with more actors? If we can make markets more efficient by reducing the number of participants, why not have our employers buy our groceries and rent apartments for us? Food and shelter are more fundamental needs than fancy medical tests. The employer food buying committee would surely not approve the purchase of ice cream, potato chips, and other junk food, so we’d eat much more healthful food.

  8. Bob

    August 3, 2009 @ 9:57 am

    8

    Phillip makes a good point.

    My employer arranges for my health care plan. We all get it. Doesn’t matter if we’re 20 years old or 70 years old, in good health or not. We all get the same plan.

    Why not open up the market and let us pick our own health plan? With the money my employer takes out of my salary for health, I could get a high-deductible plan that covers me quite well. And who knows, some competition might be good for everyone.

    Beyond that, I think it would be quite exciting if the members of Congress would at least read and understand the legislation before they rush in and pass it. Why are they in such a hurry with these things?

  9. Mike

    August 3, 2009 @ 11:11 am

    9

    I don’t get why Americans are so reluctant to embrace nationalized health care. Our system here in Canada is imperfect, no doubt, but if I get leukemia tomorrow I won’t go broke or leave my family broke after my death. This is true whether I’m a bank CEO or I’m a part time clerk at Wal-Mart.

    Health Insurance, or any other insurance, is a game in which the insurer tries to avoid paying claims as much as possible. We’ve managed to eliminate that ‘gambling’ aspect of health care in Canada, and to me that’s the smartest, fairest feature of our system.

  10. Krzysztof Majewski

    August 3, 2009 @ 6:41 pm

    10

    philg: Governments in developed countries provide welfare / unemployment insurance, and those who collect these benefits are generally smart enough to buy food and shelter with them. But they would probably not be generally smart enough to buy regular medical care, so it’s better for the government to provide this. Having the employer deal with the paperwork is a hassle, but I guess it’s an incremental step towards the US having public healthcare just like developed countries.

  11. George

    August 4, 2009 @ 10:49 am

    11

    @Phil, let me see if I can sum-up what you just wrote, the land of opportunity is now for the super-rich or super-poor, everyone else is screwed.

    @Mike, this is more then health care of USA vs. Canada or anywhere else. This is about depending and expecting more and more out of our government when it has clear records that it can’t deliver. The simple problem is our elected officials are looking after the welfare of their own states (and getting reelected) vs. the welfare of the nation as a whole.

  12. Ravi

    August 4, 2009 @ 12:03 pm

    12

    I think it would be best if for small businesses, say less than 100 employees.. the businesses can choose to follow all the above regulations. Or pay the govt a fixed percentage of the employee salary (on a progressive scale if needs be) to cover all of the above and let the govt figure it out…
    example 1:
    Bob makes $45000 a year gross.
    Employer pays 40 percent of his gross income , $18,000 to the govt, and gives Bob the rest every year.
    Govt. divides it up into:
    Withholding from employee
    FICA/SS/Medicare from employee
    SS tax from employer
    Health Insurance for Employee (yes, into a govt health plan if employer chooses this route)
    Anything else I forgot.

    example 2:
    Tom makes $150000 a year gross.
    Employer pays 50 percent of his gross income to the govt to be divided up. (This is because of Tom’s higher bracket for taxes but not his health insurance).

  13. Jim

    August 4, 2009 @ 12:19 pm

    13

    The comments from proponents of the nationalized health care show a complete lack of understanding in the basic principles of economics. First, explain why health care should be treated any different from any other industry. The answer: At some point in history employers start provided basic catastrophic coverage, then years later we got HMO style coverage with well-care and low fixed co-pays. Now we think state-of-the-art care and free drugs is a right. Sorry, people die and wealthier people will always have more options. First we get a free digital converter box – in a few years we’ll all probably expect a free 55″ LCD TV.

  14. Neal Lester

    August 5, 2009 @ 2:00 am

    14

    Jim: Health care is not exempt from the basic principles of economics but it is different from other industries. For example:

    1) The range of resource consumption if much higher for health care. Most people consume little during a given year but a few people consume a lot (more than all but the super wealthy could afford).

    2) Most people (who are healthy) don’t want to consume a lot of health care. Unlike getting a 55″ LCD TV, people don’t generally have getting a triple by-pass as a life goal.

    3) Health care is much more complicated (and the outcomes much more uncertain) then other services.

    4) Technological progress in health care is driven by extraordinarily high risk research.

    5) Access to certain health care (emergency care) is a legal right.

    Health care really is a special case.

  15. Ed Schechter

    August 6, 2009 @ 8:40 pm

    15

    Seems like the title of this blog entry is a good argument for a single payer system…

    In terms of how that could work in practice, there have been plenty of experiments and there is plenty of data. Here is one synopsis: http://dll.umaine.edu/ble/U.S.%20HCweb.pdf.
    Page 4 has a table showing (10 year old) costs, outcomes, and satisfaction.

  16. schopenhauer

    August 8, 2009 @ 4:29 pm

    16

    And it’s a whole lot worse…

    One applicant is really smart and you hire her: You break the law by using a test also shows that other people like her are smarter on average.

    You trust your employees to decide how to do their job and one is hurt: You broke the law by not enforcing health and safety.

    Two of the workers dislike each other and fight – you broke the law by violating your duty of care.

    One applicant is really smart and you hire her: You break the law by using a test to detect this which shows that other people like her are also smarter on average.

    You sell products in the USA: you learn that you are not only responsible for a health insurance plan for your employees, but also for your customers, or else a long-term employment plan for a litigation lawyers

    You work away, it being your nature. At 50 you realize you have made no health major health insurance claims yourself, nor employment, education, nor any social security or policing. You realize too that you have had no children, and are divorced from your husband – such were the pressures of work. Your workers have had 3 children a-piece, consuming plenty of health, education, unemployment taxes, not to mention the cost of police and jails.

    You shut your business down, and look back in wonder at the period from 1800-1940 when America became powerful: None of this was true.

  17. Stephen

    August 17, 2009 @ 9:57 am

    17

    Jim: Health care is not exempt from the basic principles of economics but it is different from other industries. For example:

    1) The range of resource consumption if much higher for health care. Most people consume little during a given year but a few people consume a lot (more than all but the super wealthy could afford).

    Which is an argument for insurance, not for nationalisation.

    2) Most people (who are healthy) don’t want to consume a lot of health care. Unlike getting a 55″ LCD TV, people don’t generally have getting a triple by-pass as a life goal.

    And so it is better to let a civil servant set the level of healthcare, than the consumers themselves, who are, as you have said, motivated to consume as little as possible? Why?

    3) Health care is much more complicated (and the outcomes much more uncertain) then other services.

    Perhaps, but we are not talking here of how to provide healthcare, only of how to fund it. How does this complication affect funding?

    4) Technological progress in health care is driven by extraordinarily high risk research.

    Most innovation in healthcare happens in America. If you stand to make a lot of money from an innovation, you will be more motivated than the doctor in a government health service who might get a certificate of thanks at best.

    5) Access to certain health care (emergency care) is a legal right.

    This is easily taken care of by government provision of emergency services. No need to do that to the entire healthcare system.

  18. Roman

    September 25, 2010 @ 6:36 pm

    18

    I am so shocked reading posts like Mike’s “why Americans are so reluctant to embrace nationalized health care”. Mike! who told you it works? We have all the proofs on earth that it does not, and not a single one that it does. Americans (who are reluctant) are smart! Ask canadian prime minister (the one pushing this socialist crap) why he came to US with his heart – he said “it’s my heart!” .
    Mike! I lived this socialist reality for 30 years and run away from this. After 20 years in US (legal emigrant) you want me to have the same crap? I bet brothers Castro do not believe that Michael Moor got Cuba’s “nationalized” health treatment. Theirs doctors are from Miami. I want my docs from the village I live in. FOR A GOD SAKE, FOR OUR SAKE, WHY WE (YOU MIKE) DO NOT LEARN FROM HISTORY???????? DO YOU HAVE TO PUT A FINGER IN THE FIRE TO BELIEVE YOUR MOM?
    Roman

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