Back at the beginning of November - as you’ll doubtless already know - the bill language was unveiled for the much discussed and long awaited, federal tax reform. One important provision highlighted in the bill, would lower the pass-through rate for business income to 25%, leaving the top individual tax rate at 39.6%,
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What is 'pass-through' business income?
Pass-through business income is basically any income coming from a business, that gets ‘passed through’ to business owners and is taxed at their individual rates. A significant amount of business owners’ incomes, are then taxed at a lower rate than what would be the standard maximum individual tax rate.
S corporations and payroll:
For tax purposes within the U.S. an S corporation is a closely held one that makes a valid election to be taxed under subchapter S of chapter 1 of the Internal Revenue Code. They do not generally pay income taxes, rather the corporations income or its losses, are split and divided among its’ shareholders. The shareholders must then go on to report the income or the loss, on their own personal income tax returns.
How tax reform might encourage underreporting of wages:
Reform, as it currently stands, may provide shareholders of S corporations with an incentive to inaccurately report their wages and go on to claim more as pass-through business income. In doing so, they would not be legally required to pay Medicare payroll taxes.
Other effects of tax reform which may have an impact upon payroll:
Some examples of other aspects of the new tax bill that may go on to affect U.S. business owners are listed below:
The tax reform package still must be approved in committee, and then it will need to pass both the House and Senate. In other words, there’s a long way to go before anything like what’s being proposed might be put into place.
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