ABC April 28 expressed concern over a proposal being considered by the U.S. House of Representatives Committee on Ways and Means and the U.S. Senate Finance Committee that would significantly increase payroll taxes paid by S corporation shareholders. The plan is being proposed to offset the costs of the Tax Extenders Act of 2009 which would extend tax cuts that expired at the end of 2009 through 2010.
Although the proposal is not finalized, it is expected to expand the application of payroll taxes to active shareholders of S corporations that are primarily engaged in “the performance of services.”
A letter, signed by ABC and 10 other organizations, sent to House Ways and Means Committee Chairman Sander Levin (D-Mich.) and Senate Finance Chairman Max Baucus (D-Mont.), used as an example an architectural firm whose revenue is split between architectural services and sales of architectural books. Under the new proposal, payroll taxes could apply to the percentage of the example firm’s revenue gained from the architectural services that is distributed to the shareholder, regardless of any capital investments made by the shareholder, including human capital.
“By blurring the line between income from labor and income from capital, this proposal will set the stage for future increases in payroll taxes on more capital-intensive sectors such as manufacturing and agriculture,” the letter stated. ABC pointed out that when the tax is applied to the service sector, it will hurt the ability of companies to invest in and create jobs.
ABC also noted the proposal conflicts with Congress’ decision not to apply the 3.89 percent tax in the health care reform bill to S corporation shareholders. The new proposal effectively reverses that decision.
For more information on the proposal, contact Ashley Fingarson at ABC,
Fingarson@abc.org.