Presidential Budget Proposal 2015 – Tax Change on Professional Services

by | Jul 30, 2014 | Tax and Accounting Desk

Social Security and Medicare benefits are financed through taxes on wages (FICA) while individuals’ self-employment earnings are subject to SECA taxes.

General partners and sole proprietors typically pay SECA taxes on the full amount of their net trade or business income.

Limited partners pay SECA taxes only on payments from the partnership for services provided, without consideration of the income of the partnership.

For most limited liability companies (LLCs), SECA taxation is unclear because LLCs are neither general partners nor limited partners under state law.

S corporation shareholders are subject to FICA , not SECA taxes.

Non-wage distributions to employee-shareholders of S corporations are not subject to either FICA or SECA taxes.

Regulations treat businesses according to the legal form of their ownership and of the payment received. As a result, some owners pay employment taxes on nearly all earnings (general partners and sole proprietors), other similarly situated owners pay employment taxes on only a portion of earnings (S corporation owner-employees), and others pay little tax at all (limited partners and many LLC members).

Conforming SECA taxes for professional service businesses will close this unintended gap between FICA and SECA taxes. The 2015 presidential budget proposes individual owners of professional service businesses as an S corporations, limited partnerships, general partnerships, and LLCs taxed as partnerships would be treated with similar SECA rules.

Distributions of compensation to owners of professional service S corporations would no longer have wages subject to FICA but to SECA taxes.

Owners who materially participate would be subject to SECA taxes on their distributive shares of partnership (or LLC or S corporation) income.  Owners who do not materially participate would also be subject to SECA taxes, but only on income equal to reasonable compensation.

“Professional service businesses” would be partnerships, S corporations, or other entities taxed as partnerships. This includes fields of health, law, accounting, investment advice or management, and brokerage services. This proposal would be effective for taxable years beginning after December 31, 2014.

For further information on the Presidential Budget 2015, please see these links.

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