S Corp Payroll Trap

This post is in: Business


We’ve been following a new S Corp tax through the Senate. The bill ended up passing quickly through the House and then fragmenting into three separate bills in the Senate, where none of them could get the requisite votes.

So, for now anyway, there is no new S Corporation tax.

I think it’s definitely showed Congress’s collective hand, though. They intend to find a way to tax income from an S Corporation, just as if it was a Sole Proprietorship.

In the past, S Corporations have been able to create two different types of income: salary and distribution. The distributions are not subject to payroll tax. That’s what the Bill hoped to change. They wanted to make ALL income subject to payroll tax.

The media got some of the reporting wrong, though. The bill would mean a tax of either 2.9% or 15.3%. Ironically, the lower income small biz owners would get hit the hardest by the tax (15.3%). If the biz owner had income over the Social Security limit, he would only pay 2.9%.

And if there were over 3 shareholders in the S Corporation, the tax was not applicable – specifically targeting smaller businesses.

At this point, S Corporations are safe. But, I’m not sure how much longer that’s going to be true. Keep track of tax law changes. Keep your business structures flexible. Don’t build appreciating assets inside an S Corporation (it’ll be a taxable event if you decide to distribute the assets to change the structures).

On July 13, 2010, we’ll go through the tax law changes to date this year as part of our regularly twice-monthly coaching program. For just $67/month, you can join us for this course and the 2nd one in July. Learn more about coaching HERE.


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