S Corporation Owners May Pay Higher Self Employment Taxes
The chairmen of the House and Senate tax-writing committees today released a summary of “H.R. 4213,” also called “The American Jobs and Closing Tax Loopholes Act of 2010.“ It is considered an extenders bill because it extends some favorable tax provisions due to expire this year.
However there is one item tucked away in this bill is something that could affect owners of small (3 or fewer employees) S corporations engaged in a professional service business. Some owners of such companies have been avoiding Medicare and Social Security taxes by routing their self-employment income through an S corporation. The way it usually works is the S corporation owner pays him or herself a small salary and takes out the remaining profits in the form of distributions. The wages are taxed with a combined 15.3% rate on Medicare and Social Security taxes, but the wages are held to a minimum which keeps the Medicare and Social Security taxes to a minimum.
The proposal would close this loophole for S corporations engaged in a “professional service business that is principally based on the reputaion and skill of 3 or fewer individuals.” Ostensibly, all S Corporation profits would be subject to the Medicare and Social Security taxes. The difference can be substantial, up to almost $16,000 for those who take out no wages at all.
Steve Trojan, CPA is owner of SMT & Associates, Inc, a Crystal Lake IL based tax and accounting firm, and Complete Payroll Inc, (www.completepayrollinc.com) a payroll processing firm. He specializes in tax and accounting issues affecting small business owners.
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From what I have been able to find, sec 413 was not in the House version, but the Senate version. However, it looks as if the House has agreed to add it in in the agreement phase. Do you have any further updates. This will kill small businesses in my opinion and takes away much of the advantage of the Scorp.