Other than perhaps having an advanced college degree, do you know the difference between an attorney who earns $500,000 a year or a general contractor who earns the same amount if each is incorporated as an S-corp? Well, the House of Representatives, in its infinite wisdom, or lack thereof, seems to think they’re different even if they each earn the same amount of money. The House, under the recently passed H.R. 4213 thinks they should be taxed differently. Really? I thought this was America. I thought we had equal representation………..and taxation………under the law. Silly me, I’m just a Westchester lawyer.
It seems, as is often the case, that the House decided to tack on a measure to its bill to extend unemployment and COBRA health benefits. What they tacked on in a rush just before Memorial Day was that provision of H.R.4213 which ensures the payment of employment taxes by “certain service professionals.”
Let me explain for those of you who don’t understand the significance. A small business owner may choose to establish himself as an S Corp for tax purposes. This affords him some protection from professional and general business liability and also allows him to offset some of the income as profits or dividends for the corporation. For example, if the S Corp makes $500,000 in one year, the professional may choose to pay himself a “reasonable salary” (as required under the statute) of $200,000 and declare the remaining $300,000 as corporate profits/dividends. That would mean that the professional, as a self-employed person, would only have to pay income tax, Social Security and Medicare on the $200,000 and the remaining $300,000 would not be subject. to making those payments. Now, I am not a tax attorney and I am really reducing this to the basics for laymen clarity but that is the essence of it.
According to the summary of the measure released by the House Ways and Means Committee, the new law would curtail that practice of dividing personal income and corporate profit and generate $11.25 billion in revenue for Uncle Sam over the next decade by taxing the full amount as income. That’s a big enough reason for the Obama Administration to rush this through on a holiday weekend. Uncle Sam needs the money and the alleged “party for the people” Democrats didn’t want middle America to realize what it was doing. Have you noticed how silent the media is on this issue? Granted, it has taken the financial press to bring it to the forefront of media attention but so what……….at least it’s out there!
The new regulations would be applied where an S Corp:
1. is engaged in a professional business that is principally based on the reputation and skill of 3 or fewer individuals; or
2. is a partner in a professional service business.
The definition of “professional service business” is buried on page 279 of the law and it includes and business 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. So, that means that the actors I have set-up S corps for will be subject to this tax but the photographers I have set-up S corps for will not. That also means that the architects who operate as S corps will be subject to this tax but the S corps construction contractors they draw plans for will not. There is something severely wrong in Washington when they think this is constitutional. I proffer that it is not and that it is an equal rights violation. I am not a constitutional scholar but I guarantee you that if the Senate passes a similar measure and this nonsensical premise is actually enacted, it will be overturned as against the very corner stones of this nation’s foundation of equality.