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Senate Proposes S-corporation Tax Increase to Offset Student Loan Interest Hike

Posted: April 30, 2012

Senate Democrats are considering trying to make it harder for owners of Subchapter S-corporations to avoid paying Social Security and Medicare payroll taxes on some of their earnings.

Though decisions have not been finalized, the proposal would affect such companies with earnings of at least $250,000 annually and would raise roughly $5-6 billion over the coming decade. Democrats might use it to help pay for an effort supported by President Barack Obama to keep college students' loan rates from doubling this summer.

This Democratic plan, which has been under discussion among congressional and presidential aides, would tighten the definition of S-corporation income on which payroll taxes must be paid. The idea is likely to face strong Republican opposition in the Senate even though many Republicans support preventing the student loan interest rate from increasing.

The proposal, as best we can determine at this time, will require S-sorporations with three or fewer shareholders who declare income of at least $250,000 a year to pay employment taxes.

NFDA is working with other business groups to determine the exact details of this proposal and to evaluate the political situation to better determine what course of action the association will take.