Some S Corporation Dividends May become Subject to SE Taxes
The American Jobs and Closing Tax Loopholes Act of 2010 is expected to be passed in the next week or so. In this tax act, there is a provision that states all ordinary income earned by S corporation from professional services (such as accounting, consulting, medical and other related professions) will be subject to self-employment taxes. Currently, an S corporation is required to pay appropriate salaries to owners that are active in the business, but any income earned above the salary is not subject to any self-employment tax.
Now, for those businesses that are affected, all ordinary income will either be subject to self employment tax or normal payroll taxes on salaries paid. It may now make sense not to pay any salaries for these owners since the income would not be subject to any state or federal unemployment or worker’s compensation taxes. This provision is effective for years beginning after 2010.
This provision will not apply to most farmers, however, in many situations, a farmer will set up a corporation that they will list as being in the consulting business. You need to make sure to list the corporation as a farmer and therefore, the current tax situation on these earnings still should be in effect.
Also, this is probably the first step to making all ordinary income from S corporations subject to self employment taxes sometime in the future when Congress needs to raise more revenue.
Please note this Tax Act has not yet passed, however, it is expected to become law by the end of May.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Yesterday’s newsletter from Stepto & Johnson LLP has more:
ACTION ON EXTENDERS PACKAGE MAY BE POSTPONED: With opposition mounting to the overall $192 billion cost of the bill and some of the controversial revenue offsets used to pay for it, it appears increasingly unlikely that the House and Senate votes on the extenders bill (H.R. 4213) will be held this week. If a vote is held this week, it may be on a scaled down bill. Congress is scheduled to take a week-long recess at the end of this week and return June 7.
While key Democratic leaders have been predicting that the bill would pass earlier this week, other Democrats have voiced displeasure with the overall size of the bill and some of the offsets. Democratic member Rep. Jane Harman (D-CA) said yesterday, “The conversation I’m hearing on the floor is, ‘make it smaller, make it shorter.’” Rep. Jared Polis (D-CO) said, “I’m not going to vote for the bill in its present form. I don’t think the extenders bill has the votes now, otherwise they would have brought it to the floor, so there’s still room for negotiations. Also, many House members want to see what the Senate’s going to do.” Rep. Bill Pascrell (D-NJ) said that while the bill contained important job creation provisions, there were also a lot of extra provisions in the bill. Pascrell said, “I wouldn’t use the word ‘extraneous.’ I just think how they contorted the bill makes everyone confused. It’s not just extenders; it’s not just jobs; it’s not just extensions of unemployment insurance, COBRA, helping states with Medicaid. And that’s what confuses people.”
Meanwhile, Senate Majority Leader Harry Reid said today that the Senate could still be in session Saturday to complete work on the war supplemental bill and the extenders. Reid said that the Senate must “wait and see what the House sends us.” Reid added, “We’re obligated to do these two things.” However, House Democratic Congressional Campaign Committee Chairman Chris Van Hollen said that House members need to be assured that the bill can pass in the Senate. Van Hollen said, “There’s no doubt that remains an important issue, that members want adequate assurances from the Senate that they will pass this bill in its current form.”
If the votes are lacking to pass the extenders/jobs bill, Congress could take up a short-term extension of the unemployment and health benefits and the Medicare physician fix provisions in the bill before they recess.