Possible Tax on S Corporation’s Distribution

If you have a small S Corporation engaged as a professional service business, the nondividend distributions that you withdraw may soon be subject to payroll tax.  Large S corporations would be exempt from this tax, while the small ones would not. This is part of the “American Jobs and Closing Tax Loopholes Act of 2010, which was just approved by the House and will now go to the Senate. This bill will also extend some tax cuts that were set to sunset this year, like the Educator deduction. (Thank you, Megan Hughes, for this update!)

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2 thoughts on “Possible Tax on S Corporation’s Distribution

  1. You’re welcome!

    This one is really bugging me. The buzz around the web and news stories is that the IRS is only aiming at professional services … but as long as consulting is considered a professional service, the definition can be stretched to catch just about anyone with an S Corp.

    I also think it’s horrible that the whole thing hinges on companies who depend on the reputation and skill of 3 or fewer people. What kind of precedent does THAT set for small business owners?

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