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Avoiding Self Employment Tax With S-Corp?

Many professionals that have attended my Boot Camps for Advisors have heard me discuss the benefits of operating their business as an LLC taxed as an S-Corporation and paying a portion of their earnings as salary, and the remainder as distributions, to avoid some self-employment tax.  That strategy may soon come to an end with the ridiculously named "American Jobs and Closing Tax Loopholes
Act," HR 4213.


The Ways and Means summary of the legislation states:


"Ensuring collection of employment taxes earned by
certain service professionals. Social Security taxes are imposed on
compensation and self-employment income up to the Social Security Wage Base
(currently $106,800) and the Medicare tax is imposed on all self-employment and
compensation income. Some service professionals have been avoiding Medicare and
Social Security taxes by routing their self-employment income through an S
corporation. These taxpayers then pay themselves a nominal salary and take the
position that the remaining earnings are exempt from employment taxes. The bill
would address this abuse in situations where (1) an S corporation is engaged in
a professional service business that is principally based on the reputation and
skill of 3 or fewer individuals or (2) an S corporation that is a partner in a
professional service business. The bill would also clarify that individuals
that are engaged in professional service businesses are unable to avoid
employment taxes by routing their earnings through a limited liability
corporation or a limited partnership. This proposal is estimated to raise
$11.249 billion over 10 years."

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