Senate Democrats introduced legislation Tuesday that would prevent student loan interest rates from doubling this summer. Its $5.9 billion cost would be paid for by making it harder for owners of so-called S corporations to avoid paying Social Security and Medicare payroll taxes on some of their earnings.
The proposal would affect such companies with earnings of at least $250,000 annually and whose revenues come from the work of three or fewer owners. It would also apply to some lawyers, doctors and other professional service businesses that are owned by partnerships. Called the “Mitt Romney” bill because Romney uses a S-Corp to shield millions in earnings from taxes.
But there’s a problem. Most S-Corps are not Mitt Romneys. They are the smaller businesses. Mostly just side or starting out businesses, or professionals like dentists. Engineers who are considered full on slaves by the IRS are not allowed to form a S-Corporation and then be a consultant. Engineers are the only people not allowed to be consultants under US Law.
Unfortunately unless you add language which makes it clear that we are talking about salaries above one million dollars, this leglislation in 99 out of 100 times will not hit the Romneys but instead the small starting out businessman. Which in turn will end any hope of an economic recovery. S Corps are typically the smallest businesses and the starting out businesses. If the government makes it even harder to be a S Corp it’s pretty much game over for economic growth.
But the Democrats know that. They are pushing for a state controlled mega corp society. That is their dream. Facism cannot well control a million tiny companies. What is truly shocking about the bill is that in their grab for more taxes they don’t understand the engine of the economy. It would be hard to argue that American’s are under taxed. Americans pay more taxes and receive less than any other nation on earth.
House Democrats said late Tuesday that they would introduce a similar bill, also financed by boosting payroll tax collections from many private companies’ owners.
The Democratic tax plan, which has been under discussion among congressional and Obama administration aides, would tighten the definition of S corporation income on which payroll taxes must be paid. The idea was already eliciting Republican opposition, but Democrats believe there would be political value in forcing GOP senators to vote on the measure, win or lose.
S corporations do not pay corporate income taxes. The company’s earnings flow through to their owners, who include them in the individual income taxes they pay.
But those owners only have to pay Social Security and Medicare payroll taxes, which this year are 5.65 percent for workers and 13.3 percent for self-employed people, on company earnings that they declare to be their salaries. They owe no payroll taxes on the part of their compensation that they consider to come from their firm’s profits.
S corporations are a widely used way of forming businesses, commonly used by many professional service practices like doctors and lawyers, as well as by construction, retail and real estate companies. There are more than 4 million of them in the United States. They are named after the sub-chapter of the tax code that defines them.
A 2009 report by the Government Accountability Office, an investigative agency of Congress, estimated that in 2003 and 2004, shareholders of S corporations under reported wages by nearly $24 billion, “which could result in billions in annual employment tax underpayments.”