Just when it looked like the small businesses in this country might begin to bounce back, our elected representatives are working to close the “tax loopholes” used by small professional companies operated as S-Corporations:
H.R. 4213 American Jobs and Closing Tax Loopholes Act
At present, S-Corporation shareholders who are employees working in the business must take a “reasonable wage” via payroll. Any remaining profits may be passed through to the shareholders without being subject to self-employment tax (Social Security & Medicare). The new bill just passed by the House and on its way to the Senate will charge self-employment tax on the distributions that S-corporation shareholders take over and above payroll. It’s only for S-corporations providing “professional services” and only for those with three shareholders or less, but it’s a major hit to the small business recovery, nonetheless. According to the bill, “professional services” include “any trade or business if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.”
Let’s just keep our fingers crossed that our Senators see the folly of applying this tax only to small service businesses and not their bigger competitors.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.
Larry Keltto says
Do you know what the status is of this legislation?
Deb Greenleaf says
It’s currently being debated in the Senate, though much of the media focus in on the extension of unemployment benefits contained in the bill.
It was already limited to 12 specific service areas, such as law, accounting, and medicine. Since the Senate got involved, they’ve specified that the S-Corp compensation rules would only apply “…if in the above service areas 80% or more of the income is attributable to the services of three or fewer owners, all S corporation income will be subject to payroll taxes.”
Deb Greenleaf says
The final bill passed by Congress included an extension of unemployment benefits, but no new taxes. The President has signed a version of HR 4213 that passed Congress without the new tax on small professional S corporations.
Is it too much to wish for to think they actually responded to the outcry of small businesses? Either way, small business owners have another “win” in our column!