New Tax on "S Corps" May Become Law in the Fall

S Corp dividends will probably be taxed for 2011 and beyond for self employment tax purposes under House and Senate Bills currently in Congress for personal service type S firms. A personal service type firm would be a CPA, attorney, engineer,or other service provider type entity.

Currently S Corp dividends paid to professional service providers are not subject to self employment tax rates. Self-employment tax rates are currently 15.3% on the first $106,800 of earnings and 2.9% on the excess. The IRS has contended that this is a tax loop hole for non payment of taxes, since more dividends are paid than W-2 wages, and professional service providers provide only earnings from services and not capital.
Interesting, when you have to invest money for facilities and computer systems. Oh well!

A question remains whether W-2’s will be issued to owners of the S Corps, or if quarterly taxes estimates become the preferred method of paying in withholding and self employed taxes.