The House Ways and Means Committee recently released a package of tax extenders, which is partially offset by an increase in the S corporation payroll tax on firms in service industries.

The proposed legislation targets certain business including professional or personal services firms that specialize in architecture, engineering, law, performing arts, accounting, health, actuarial science, lobbying, consulting, brokerage services, investment management, and sports. These small personal service S-corps will be hit if there services are defined as where their principal asset is the reputation and skill of three or fewer workers.

Specifically, the legislation aims to target owners of those S-Corps by subjecting their entire profit to SECA tax. The tax is currently 15.3% of the first $106,800 in profits and 2.9% above that. The days of taking a reasonable salary subject to SECA tax and taking the rest out as dividends may well be numbered for these small firms. This proposed legislation would eliminate one advantage of electing S-Corp status.

Also, firms with numerous employees could be affected, as long as only three are key to the business. Principal asset means that "skill and reputation" would have to be valued at more than the largest asset of the business.

There is also no exception for working capital left in the business for smaller professional S-Corps. Larger S-Corps that are not in the professional service fields will have their retained working capital continue to be exempt from self-employment taxes.

Keep your eyes open for this proposed legislation to be enacted.