Sens. Olympia Snowe (R-Maine), Mike Enzi (R-Wyo.) and John Ensign (R-Nev.) filed an amendment to the American Jobs and Closing Loopholes Act of 2010 (H.R. 4213) that would strike Section 413 of the measure that would increase the payroll tax on S corporations.

Section 413 would raise taxes by $11.2 billion by requiring principals in professional-service S corporations to pay employment taxes on a firm’s profit. According to lawmakers, some S corporation owner-employees—especially those engaged in professional services like law and accounting—avoid self-employment taxes for Medicare and Social Security by paying themselves a small salary, or no salary at all, and collecting their income instead as corporate profits. Those profits of an S corporation are passed through to the shareholders. Under this proposal, these shareholders would have to pay employment taxes on all of the income they earn through it, not just on compensation. While there are certain taxpayers who are underpaying their payroll taxes, this proposal is especially detrimental to those small, professional-service businesses who are already paying their fare share as it will reduce the capital these employers have to create jobs and invest in their businesses.

Section 413 would require firms—regardless of how many employees they have—to test each year to determine whether the "skill and reputation" of one, two, or three key employees is the firm’s "principal asset." The enforcement challenges accompanying the valuation of intangible assets are too numerous to list. The IRS currently has an audit procedure in place and uses a "reasonable compensation" test to ensure S corporation shareholders pay the correct amount of tax.  Replacing this established test with a "principal asset" test is a step backward for tax enforcement and will result in more increased tax collections than increased tax compliance.

Senate Finance Committee Chairman Max Baucus (D-Mont.) has indicated that the language in the tax extenders bill would make it more difficult for S corporations to avoid paying employment taxes but did see some merit in modifying the language. Meanwhile, House Ways and Means Committee Chairman Sander Levin (D-Mich.) supports the provision and recently said that he prefers the Senate not tweak the measure, let alone strike it from the bill.

NSBA joined a diverse collection of small-business advocates and sent a letter to Baucus and Ranking Member Charles Grassley (R-Iowa) urging their support for the Snowe-Enzi amendment striking the tax increase on S corporations from the so-called tax extenders bill. 

The Senate is expected to continue debate on the bill this week, at which point the senators' amendment could be voted on.