Congress Aiming to Increase Tax on “Professional Service Business” S-Corporations

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Via Forbes.com

In the same bill highlighted yesterday regarding carried interests, congress is setting their sites on increasing taxes on small businesses.

Much like a partnership, profits from S corporations are generally not taxed at the corporate level, but are passed through and taxed to the shareholders, regardless of if those profits are distributed or not.  Shareholders who also work for the S corporation are required to be paid a reasonable salary which is subject to payroll taxes, but any profits in excess of that reasonable compensation is not subject to payroll taxes.

H.R. 4213, which was recently passed by the House, would subject all income of a “professional service business”, like lawyers, doctors and accountants, to payroll taxes, including the newly passed Medicare surtax which goes into effect in 2013.  In general, this could represent a new tax on S corporation profits of 15%.

We will continue to monitor this legislation and keep you posted.

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