[Congressional Record (Bound Edition), Volume 158 (2012), Part 1]
[Extensions of Remarks]
[Pages 540-541]
[From the U.S. Government Publishing Office, www.gpo.gov]




     INTRODUCING THE NARROWING EXCEPTIONS FOR WITHHOLDING TAXES ACT

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                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                       Tuesday, January 31, 2012

  Mr. STARK. Mr. Speaker, I rise today to introduce the Narrowing 
Exceptions for Withholding Taxes Act. This legislation will close a 
loophole in existing tax law that allows certain self-employed 
individuals to avoid paying their fair share of Medicare payroll taxes.
  Medicare is financed in part by a payroll tax paid by employers and 
employees. The total tax is 2.9 percent split between workers and 
employers. Self-employed individuals pay the full 2.9 percent 
themselves.
  Under current law, the S corporation structure allows certain self-
employed individuals a way to avoid paying full Medicare taxes. Income 
received as compensation for services to that S corporation will be 
subject to the Medicare payroll tax, but any income classified as a 
distribution of profits will be exempt. This loophole in our tax law 
encourages income manipulation. These individuals pay themselves a 
nominal income for their services to the S corporation and classify 
most of their income as profits and dividends, to avoid paying the 2.9 
percent payroll tax.
  The House Democrats first tried to close this loophole in December 
2009 with H.R. 4213, the American Jobs and Closing Tax Loopholes Act. 
That bill passed the House, but did not pass the Senate. At the time, 
the Joint Committee on Taxation scored this provision as raising $11.2 
billion in revenue over 10 years.
  The IRS does not have the resources to audit all 4 million S 
corporations to ensure that there is no underreporting of income. The 
Treasury Inspector General for Tax Administration, the Joint Committee 
on Taxation and the GAO have all highlighted the systematic 
underreporting of income. The GAO estimated that pass-through 
organizations underpaid $15 billion in 2001, with a median payroll tax 
underpayment of $20,127.
  Teachers, firefighters, and nurses can't structure their income to 
avoid payroll taxes. This is a strategy for lawyers, lobbyists, and 
investment managers. This legislation would close this loophole by 
targeting the individuals most likely to take advantage of this 
loophole. These are professional service businesses built on the 
reputation and skill of three or fewer employees in the fields of 
health, law, lobbying, engineering, architecture, accounting, 
investment advice or management, or brokerage services. Under this 
provision, all of the profits someone gets from an S corporation they 
own would be subject to the payroll tax. These shareholders will no 
longer be able to underreport wage income to exclude the rest of their 
earnings from the payroll tax.
  Former House Speaker Newt Gingrich took advantage of this loophole. 
When he filed his 2010 taxes, he reported earnings from his two S 
corporations of just $444,327 in income but $2.4 million in profits and 
dividends. This nearly $3 million was just earnings in the same year 
from the same two organizations. However, by choosing to report only 
$444,327 as

[[Page 541]]

wage income, the Wall Street Journal estimated that Mr. Gingrich saved 
himself $69,000 in Medicare payroll taxes. His $2.4 million in profits 
and dividends was exempt from the 2.9 percent payroll taxes due to a 
flaw in our tax laws.
  This legislation would put our workers on an even playing field. 
Self-employed individuals would no longer have the option to avoid the 
taxes with the creative use of a pass-through entity. Just like those 
individuals who work in an ordinary partnership or sole-proprietorship, 
or work for a larger institution, every taxpayer would pay his or her 
fair share toward the Medicare trust fund.

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