If Congress succeeds in passing 4213, the S Corp, will no longer be avaliable to many businesses!!!

The Big Tax Increase Facing Small Business
From an article by Dean Zerbe,
Hedge fund taxes get all the attention. Congress is about to raise billions in taxes on some doctors, accountants and architects.

While a possible increase in taxes on the "carried interest" of hedge fund and private equity money managers is getting all the attention, in the same bill Congress is also creating a tax mess for small-business owners in the form of an $11 billion tax hike over the next 10 years.

The tax increase was included in H.R. 4213, a peddler's wagon of legislation (new spending, physicians' reimbursement, extensions of expired tax breaks, etc.) that was passed by the House in a narrow vote just before Memorial Day and is now being considered by the Senate. The Democratic-backed Senate version of the bill includes the same tax on small business.

tax hit affects the owners of small S corporations (a common way many small businesses are organized) in "professional service businesses"--doctors, lawyers, accountants, engineers, architects and so on. An S corp pays no taxes but passes through all its profits to its owners' tax returns, even when those profits or "distributions" are reinvested in the business.

Professionals have long been able to reduce their tax bills by incorporating as S corps and then receiving part of their earnings in the form of distributions or profits, rather than taking it all as ordinary compensation or wages. Unlike wages, profits aren't subject to payroll taxes--that is, Social Security and Medicare taxes. It is this longstanding tax benefit that the House has eliminated for certain small S corporations.

Here's why this is a big deal: The Social Security tax is now 12.4% of the first $106,800 of wages, with half paid by the employer and half by the employee. A self-employed person pays the whole 12.4%. The Medicare tax is 2.9%, with no cap on the amount of pay taxed. This too is split between employer and employee, with the self-employed paying the whole 2.9%.

Moreover, under the recently passed health care legislation, beginning in 2013, couples with compensation exceeding $250,000 (and singles with more than $200,000 in compensation) will have to pay an additional 0.9% Medicare surtax on their pay above that amount. (For more on how this tax works, click here.) The upshot is that many small business owners will view this provision (especially when they are writing checks to the U.S. Treasury) as a new 15% tax.