Tax hike looms for S-Corp Business Owners

July 23, 2010  |   Posted by :   |   Business Tax Advice,In The News   |   Comments Off»

Tom Donahue, President and CEO of the US Chamber of Commerce, recently posted an article titled “Turn Off The Tax Faucet” at USChamberMagazine.com which describes possible new legislation that would hurt small business owners.

In the article, Tom describes how Congress and the Obama administration is desperate to tap sources of tax revenue.

“One of the legislation’s most alarming provisions is a payroll tax on certain individuals and small businesses that form S-corporations. Under current law, owners of S-corporation service-sector companies—such as architectural and accounting firms—don’t pay taxes at the company level; rather, the owners pay personal income taxes on the business profits as a shareholder in the company. Increasing taxes on fully compliant small business owners and making the tax code even more complex would not inspire confidence in our nation’s primary job creators.”

One of the most alarming provisions of the proposed legislation is:

In the past, S-corporation shareholders would only pay social security & medicare taxes totaling 15.3%  on their salaries and would not have to pay that tax on the portion of the income that was received as dividend distribution and/or kept in the business. The provision seems to target small business and professional and consulting firms.

There is actually a “laundry list” of permanent taxes that may be imposed on small businesses to help pay for the “American Jobs and Closing Tax Loopholes Act” or the “jobs bill”.

It’s worth noting that Speaker of the House – Nancy Pelosi has posted her spin on this “jobs bill” act. You can read it at http://www.speaker.gov/newsroom/legislation?id=0374.

Like most bills, the provisions are buried in legislation (this one  is supposedly beneficial in “creating jobs”).  In her comments she refers that the above S corporation provisions closes a major loophole for wealthy attorneys and lobbyist and others, but the fact is,  it will affect many small consulting and professional businesses whose “principal asset” is the reputation and skill of 3 or fewer workers.  Social security is supposed to be a retirement contribution, and your retirement income (if you live) is based on your contribution just like any other retirement, but the government seems intent in considering this as a mandatory payroll tax.

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