Big Government Targets Freelancers

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.

Ryan M. Healy

Ryan Healy is a financial copywriter and the author of Speed Writing for Nonfiction Writers. Since 2002, he has worked with scores of clients, including Agora Financial, Lombardi Publishing, and Contrarian Profits. He writes a popular blog about copywriting, advertising, and business growth, has been featured in publications like Feed Front magazine, and has been published on sites like WordStream.com, SmallBizClub.com, and MarketingForSuccess.com.

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