12. June 2010 04:29
US House Bill 4213, Section 413 is proposing that for the first time certain S-Corps will pay self employment tax on its dividends.
If this bill is passed in its current draft, any professional service S-Corp with three or less key employees providing the bulk of the principal asset, that being “skill and reputation,” will be subject to self-employment (SE) tax on all of its dividends. Examples of personal services firms, are health, law, lobbying, engineering, architecture, accounting, actuarial science, performance arts, consulting, athletics, investment management, and brokerage services.
So if a CPA firm has three key employees providing their skill and reputation as the major asset of the firm, the owners will most likely have to pay SE tax on all of their earnings. This does not mean that the firms has only three employees, it just means they provide the major asset, “skill and reputation”. And if the firm’s largest asset is equal to 15%, the S-Corp would be subject to this new tax provision if the “skill and reputation” was valued at 16%.
It is estimated that just over one million S-Corporations will be affected by this new tax provision. Good luck trying to value the skill and reputation, let alone the key employees providing that value.
Here is a link to the bill: http://www.opencongress.org/bill/111-h4213/text?version=eah. You will find section 413 in the Engrossed Amended House Version H.R.4213.