The only real chance to get any reward for the risk of running a small business is under attack yet again. The Democrats have proposed legislation that would start the crackdown on receiving a distribution that is not subject to a payroll tax involving S corporations.
Congress believes that many owners of S companies take artificially low salaries so they can receive the bulk of the corporation’s profits as distributions, which are not subject to payroll taxes. Never mind the fact that the IRS has been armed in dealing with this issue and have been effective in court cases dealing with this issue.
The current proposal by Senate Democrats is aimed at Upper-income owners of personal service S firms would owe SECA tax on their share of the firm’s profits if 75% or more of the corporation’s gross income. Especially if the income was attributable to the services of three or fewer of the firm’s shareholders. This rule specifically applies to married owners with modified adjusted gross incomes over $250,000 and single shareholders with modified AGIs above $200,000.
Here modified AGI is figured by taking adjusted gross income and adding back any excluded foreign earned income and the write-off for a portion of self-employment tax paid.
The S Corps targeted would be: Accounting, law, health, engineering, lobbying, investment advice, actuarial science, brokerages, consulting, architecture, athletics and performing arts.
Similar rules would apply to partners in personal service partnerships.