S Corporations Target of New Tax

July 29, 2010

Congress continues to look for ways to generate more revenues from taxpayers. The current target is the S Corporation, specifically professional service firms that are abusing the system by understating the wages of workers.  It is estimated that about 13% of all S Corporations fall in that category, according to a recent article in Forbes. A proposed bill in the House would mandate payroll taxes be paid on all income from 12 professional services in the fields of accounting, actuarial science, architecture, athletics, brokerage services, consulting, engineering, health, investment advice and management, law, lobbying, and performing arts.

S Corporation employees working in the business must make a reasonable wage, for which there is no particular measure at the present time.  The IRS' plan is to use a quantitative approach, saying that if 80% of more of the income of the S Corporation is attributable to the services of three or fewer owners, all S Corporation income will be subject to payroll taxes.  Both the Senate and the House bills seem to focus on the magic number of three.

As we approach the end of 2010, S Corporation owners should review their ownership and employment arrangements and modify them, where necessary.

As the situation becomes clearer, we will keep you posted.  For more information, contact your Perelson Weiner partner.

Read more: http://www.bizactions.com/n.cfm/page/e105/key/142050610G817J1851686P0P10148585T0/#ixzz0v5HjHyb2

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