Big government is getting desperate. They’re spending far more than they’re collecting. And now they’re doing whatever they can to bring in more tax revenue.
And that means more taxes, more IRS agents, and more audits.
This time, big government is targeting service providers. If you’re a freelancer, that includes you.
For the past few years, I’ve used a tax loophole to avoid paying payroll taxes on a portion of my income. I file as an S-corp so I can take shareholder distributions, which currently are not subject to payroll taxes.
But it appears this may change as soon as January 1, 2011.
As Megan Hughes reports, the S-corp tax bill has already passed the House.
Diane Kennedy then explains that, if passed by the Senate, the “American Jobs and Close Tax Loopholes Act of 2010″ bill would require service providers who file as S-corps to pay a 15.3% payroll tax on all distributions.
It’s critical that you educate yourself about these potential tax changes, especially if (like me) you’re a service provider who files as an S-corp.
This new tax bill would force me to pay an extra $7,000 per year in taxes, minimum. As you can imagine, I’m not too happy about that.
I see a couple possible ways to skirt the new tax:
1. Since the new law (unfairly) applies only to small corporations with three or fewer shareholders, I could perhaps bring the total number of shareholders from one to four.
2. Since the new law specifically targets service providers, then I could perhaps stop being a service provider and generate my income by selling products.
Just some things I’ve been thinking about since I learned of this new law over the weekend. And please, please make sure you read the two articles I linked above.
Update July 9, 2010: For now, it looks like S-corps are in the clear. According to Diane Kennedy, the S-corp bill failed to pass.
-Ryan M. Healy
P.S. Thanks to Ben Settle for bringing this issue to my attention.
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About Ryan M. Healy
Ryan Healy is a direct response copywriter. Since 2002, he has worked with scores of clients, including BoostCTR, Alex Mandossian, Terry Dean, and Pulte Homes. He writes a popular blog about copywriting, advertising, and business growth, has been featured in publications like Feed Front magazine, and is a regular contributor to WordStream.com, BoostCTR.com, and MarketingForSuccess.com.
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{ 15 comments }
Ryan, I've been looking at the language in the law and I'm not entirely sure writers and copywriters (or anyone in advertising, except consultants and coaches) are affected by this.
I still have to discuss it with my tax guy, of course.
He's been blogging about it and he's pretty ticked off about it himself.
But here's what I read on Diane Kennedy's site (she's awesome) about who it applies to:
“involved in professional services if substantially all of the activities of such trade or business involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services”
I wonder if this applies to copywriters?
Or any kind of writer?
I have no idea either way, but I suspect even if it doesn't now, it will later.
Ben Settle
Regretfully, another assualt on small business. The politicians can talk all day long about helping small business, but the truth is it gets tougher on small business and freelancers every year.
John Deck
I certainly hope the new law doesn't apply to copywriters, but that word “consulting” could be broadly applied.
Funny… a guy just unsubscribed and sent me this gem: “I don't want somebody plugging their political views on me using scare tactics. Its a responsibility and a privilege to be a business owner quit crying and pay the taxes!!”
What's political about sharing a new law that's about to be passed? Hello, that's NEWS, not a “political view.”
“It's a responsibility and a privilege to be a business owner, quit crying and pay the taxes!”
10,000 to 1 odds says that dude is NOT a business owner.
To the guy who said its a responsibility and a PRIVILEGE to pay taxes: I always like to ask,
“at one point would even YOU feel it was too high? …60% – 70% – 80% – 90%???? just tell me when even you, mister happy taxpayer, would cry UNCLE????”
Thanks for all your emails Ryan, …its these kind of notices that cause me to subscribe in the first place. :-)
Bruce Ruby
Hi Ryan,I follow your stuff and love it ,I'm a Brit and we get absolutely hammered over here,good luck pal.
Warm regards, Paul
This guy sounds like a complete jerk. I don't like the new law either although your article was the first I heard about it. Gee….why am I not surprised!?
Frankly I don't pay any attention to what those a– h—- in Washington do. And I think there's a lot of people in Amerika who're just getting so tired of of all the gesticulating, posturing and pontificating in Washington that they're just thinking, “Leave me the hell alone!”
I'm pretty much to the point where I think it's naive to think that mere democracy is anymore the solution. I was reading the Declaration of Independence a couple nights ago and…..I can empathize with how they must have felt.
Washington is so far divorced from reality it's pathetic. I seriously doubt whether their little house-of-cards is going to last much longer. That whole crowd up there has just about alienated everybody in the country and pretty soon they're going to be left sitting there governing nothing but themselves. After about half the union secedes we'll see how they like it.
“Since the new law (unfairly) applies only to small corporations with three or fewer shareholders, I could perhaps bring the total number of shareholders from one to four.”
Couldn't you put your wife, brother, dad, uncle, etc. down as “shareholders”?
Big disclosure: This is just the first thing that popped in my head and I am NOT an attorney, accountant or in any way qualified to make a professional suggestion. :)
“the truth is it gets tougher on small business and freelancers every year.”
Sure seems that way. Thanks for commenting, John!
Bruce,
That's the big question: At one point is taxation “excessive”?
Thanks for the compliment — glad I'm providing value. :-)
Ryan
That's what I was thinking — just make a few family members shareholders. What I don't know is whether or not they'd have to actually do anything. :-)
Thanks, Paul. Maybe your new PM can start turning things around. :-)
Although he's a big fan of NHS, so who knows?
Ryan
So is it possible that's it better to now be a sole proprietor to avoid the 7k cost Ryan?
Actually, sole proprietors already pay this tax on all their income. As an S-corp you get to avoid payroll tax on a portion of your income. The new law, if passed, would basically eliminate this tax advantage. An LLC or S-corp may still be better from a liability perspective.
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