Treasury Department Suggests S Corporation Tax Change

To increase Social Security and Medicare tax collection, a recent Treasury study suggests making all operating earnings of single-shareholder S corporations subject to employment taxes.

(PRWEB) December 16, 2005 -- A recent Treasury Department study suggests making sweeping changes to how single-owner S corporations are taxed. Under the proposed recommendation, individuals who operate one-person S corporations would be required to pay employment taxes on their operating income.

The Treasury study argued one-person S corporations have become a major tax shelter. The study concluded, "The S corporation form of ownership has become a multibillion dollar employment tax shelter for single-owner businesses" saving small business owners $5.7 billion dollars in employment taxes in 2000 alone.

One-person businesses which operate as sole proprietorships are required to pay self-employment taxes on their entire operating income. Owners of S corporations, who set their own salary level, have more leeway in determining what salary is "reasonable."

"Operating a small business as an S corporation offers the owner a major advantage in saving money on employment taxes. Unfortunately, some entrepreneurs abuse the privilege," says Peter Hupalo, author of "How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners." (http://www.thinkinglike.com/S-corporations.html)

"Once a reasonable salary is paid to officer-shareholders running a profitable S corporation, profits in excess of a reasonable salary can be removed as employment-tax-free dividends. This can save a typical entrepreneur $6,000 per year in employment taxes," notes Hupalo.

Hupalo says S corporations have another major advantage. Money retained within the company for growth isn't subject to employment tax. "Consider a sole proprietor who is struggling to start a new business. Maybe, in the first year, the entrepreneur works part-time while holding another job. The company earns a modest $30,000. With a sole proprietorship, the individual is forced to pay about $4,500 of those earnings in self-employment taxes. That money isn't available for the entrepreneur to reinvest in growing the business. With the S corporation, the $30,000 can be retained within the company and isn't subject to employment tax."

"I feel there should be a change to put sole proprietorships on the same tax footing as S corporations. But, not by trying to tap S-corporation owners for more Social Security and Medicare taxes. Instead, sole proprietors should be given the option of choosing a salary level and not paying self-employment tax on money used for business growth," says Hupalo.

"How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners." (http://www.amazon.com/exec/obidos/ASIN/0967162440/)

Treasury Department Study: "Actions Are Needed to Eliminate Inequities in the Employment Tax Liabilities of Sole Proprietorships and Single-Shareholder S Corporations."

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