Four Democratic Senators have introduced legislation that would subject pass-through (non-corporate) business income to payroll (Social Security/Medicare) taxes. Currently, many pass-through businesses (S corporations, partnerships, sole proprietorships) characterize some of their business income as dividends or other non-wage income and thus avoid having to include it in the payroll tax base.
At the end of October, Sen Sheldon Whitehouse (D-RI), with four Democratic cosponsors, introduced a bill (S.1174) that would subject pass-through business income to payroll taxes for pass-through business owners with incomes in excess of $400,000. S.1174 would also remove the Social Security wage base cap on incomes above $400,000.
Companion legislation is also pending in the House, where it was introduced by senior Ways & Means Committee member Rep. Lloyd Doggett (D-TX). Another similar bill, HR 34, was introduced, with 66 Democratic cosponsors, in the House back at the beginning of the 118th Congress.
It is unlikely the wage base portion of the bill will get a lot of attention/action any time soon, but the piece that prevents pass-through business owners from characterizing income as something other than "wages" and thus escape payroll taxes has long been viewed by many Congressional tax writers as a "loophole" that should be closed. Given the intense hunt for revenue that is coming in 2025, it is possible this proposal will come up for debate next year.
Prospects: There is not a lot of buzz on these bills right now—the House versions were introduced last year and did not trigger much interest. And after the Democrats’ defeat on November 5, it is likely there will be even less interest in this legislation in 2025. But, given the urgent need for revenue (whether by spending cuts, tariffs, or tax increases) to offset extension of current law individual income and capital gains tax rules—and the potential insolvency of the Social Security trust fund within the next ten years—it is an issue that bears a close watch.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org