Big Tax Hike for S corporations
One of the main advantage for forming an S corporation is about to go away.
Right now, S corporation shareholders only pay employment taxes on the wages paid. But thanks to Section 413 of HR 4213-American Jobs and Closing Tax Loopholes Act of 2010, that's about to be a thing of the past.
This provision is tucked in on page 283 of a 400+ page document. All the newscasts are focusing on the "tax extenders" which are generally pretty nice.But if you're a consultant operating as an S corporation this will have a huge impact on your tax bill.
If this bill is signed, which seems likely, effective the 2011 tax year, shareholders will have to pay the self-employment tax on his/her pro rata share of the taxable income of S corporations that engage in professional services.
Professional services is specifically defined as
any trade or business if substantially all of the activities of such trade or business involve 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
This bill closes the "loophole" that makes S corporations so attractive for professionals & consultants.
Stay tuned for updates...