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HALLIDAY & COMPANY is interested in helping you achieve your individual and business financial goals. Understanding basic financial and tax concepts will help prevent costly mistakes and allow you to operate as efficiently as possible. For this reason, we publish “ACCOUNT-ABILITY” as a resource of helpful information, which we hope, will benefit you personally and/or as a business owner. |
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E-Mail brent@hallidaycpa.com |
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This newsletter offers factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. No party assumes liability for any loss or damage resulting from reliance or use of this material. |
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A SECA (Self Employment Contributions Act) tax hike looms for S firm owners. The tax will be assessed on all profits of service firms, starting next year. The revenue raiser, a late addition of a bill the reinstates a set of expired tax breaks, helps offset a portion of the measure’s tax relief. Even though lawmakers failed to approve the bill before Memorial Day, the tax increase on S firms will be part of a measure when if finally passes.
The bill targets personal service S firm businesses where the principal asset is the reputation and skill of three or fewer workers. Owners of S firms that are partners in a service partnership will owe SECA tax on their entire profit. Currently, the tax is 15.3% of the first $106,800 in profits and 2.9% above that.
The profits of small S firms in these fields will be subject to the SECA tax: Accounting, Law, Health, Actuarial Science, Engineering, Architecture, Lobbying, Consulting, Brokerage services, Investment Management, Sports and Performing Arts.
The change will end a popular tax saver for personal service S firms, which was taking a modest salary and receiving the rest of the profit as a dividend. S corporation profits flow through to the owners’ individual income tax returns as dividends. Those dividends are exempt from self-employment tax, but are subject to income tax. A few years ago, Treasury inspectors found massive tax avoidance in this area. More than 35,000 one-owner S companies with profits of $100,000 or more paid no payroll taxes on the profits because the owners did not take a salary. The same was true for owners of about 40,000 S firms with profits in the $50,000-$100,000 range. So taxwriters decided to take action to end any possibility of gaming the system. This ends one advantage of choosing S status for small service businesses.
No exception will be allowed for amounts left in the firm for working capital, at least for small service S firms. Dividends passed through to owners of larger S service forms or of S corporations that are not in professional service fields, such as manufacturers, will continue to be exempt from self-employment tax. |
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S CORPORATIONS TO START PAYING SELF EMPLOYMENT TAX |