May 5, 2011

Massachusetts Bill Would Level Playing Field For Small Business OwnersBy Jamie DowneyBoston.com

In 2008, the Massachusetts Department of Revenue clarified existing tax law in Directive 08-3. Under this Directive, self-employed individuals are denied a deduction for Massachusetts income tax purposes for contributions into a 401(k) plan. The law seems to discriminate against the self-employed business owner, as all other classes of employees are allowed a deduction for contributions to a 401(k) plan. Additionally, employees at not-for profits and in the government sector receive a deduction for contributions to similar deferred compensation plans such as a 403(b) plan.

Here is how it works. The business owner / self-employed individual that provides the job, provides an employee benefit package that includes a 401(k) plan, in many cases provides matching contributions for the employees’ and pays for the administrative costs of a 401(k) plan is denied a tax benefit for their personal contribution to the plan. However, the employee, that is a recipient of all these benefits, receives a tax benefit in the form of a tax deduction. This makes no sense and does not provide a level playing field that is often the goal of good tax policy.

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