Payroll Taxes: Are the Days of Big Earnings Over?

Sitting in the big chair is the goal of most up and coming business moguls. They long to have the huge salary and big tax breaks. This is the reason why many people get into business in the first place. One of the biggest benefits those at the top have enjoyed is the ability to make a large salary which is virtually free from payroll taxes. After all, this is why the company was formed as an S corporation in the first place.

It is exactly this kind of mentality which the American Jobs and Closing Tax Loopholes Act (H.R. 4213) is trying to get rid of. They want all employees to be held culpable for the taxes that they have been avoiding. The bill which is stalled out in the Senate looks to make it where those at the head of the S corporation will have to pay all of the Social Security and Medicare Taxes on all of the income that they receive.

To date, the majority of those at the top received a portion of their income through the same payroll services all employees receive their pay through. The remainder of the income has been doled out and reported as corporate income. According to the laws which are currently in place, this is completely legal behavior. The new law will make it where those at the top will be accountable for more than just the state and federal taxes.

One of the tests they are looking to put in place is to make it where all corporate income for an S corporation where the income is based on the skills of three or fewer employees is taxed. This will mean small business payroll services might be handling removal of the payroll taxes for a very large portion of the income for the largest earners in the corporation. Analysts have determined this will generate another $11 billion in the next ten years.

While this may sound like it is robbing the income of the major earners of the S Corporation, keep in mind there are investment funds like IRAs which will allow the execs to invest their money with tax exemptions. In fact, the olive branch has been extended by allowing extensions in the tax protection for investments into retirement funds for corporations who will willingly make the necessary changes to the payroll structure. This will allow them to still be able to save their money for later without losing a lot to taxes.

The changes congress is looking to make are not to punish executives. It is designed to stop abuse by corporations which are intent on keeping money out of the social security system. This is a system which many in office have made a key position they took as they were campaigning for their office. To fall short on delivering on corporate corruption would be political suicide.

Best of all, those on their way up are still being given a way in which their money will be protected from taxation. This means that the days of big earnings are not over, you will just have to go another route to save your money for later.

Image Credit to, March 23, 2010.