I 

113TH CONGRESS 

1ST SESSION H. R. 348 

To amend the Internal Revenue Code of 1986 and the Social Security Act 

to provide for employment tax treatment of professional service businesses. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 22, 2013 

Mr. RANGEL (for himself, Mr. VAN HOLLEN, Mr. BLUMENAUER, and Mr. 

MCDERMOTT) introduced the following bill; which was referred to the 

Committee on Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 and the Social 

Security Act to provide for employment tax treatment 

of professional service businesses. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Narrowing Exceptions 

5 for Withholding Taxes Act of 2013’’. 


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1 SEC. 2. EMPLOYMENT TAX TREATMENT OF PROFESSIONAL 

2 SERVICE BUSINESSES. 

3 (a) IN GENERAL.—Section 1402 of the Internal Rev4 enue Code of 1986 is amended by adding at the end the 

5 following new subsection: 

6 ‘‘(m) SPECIAL RULES FOR PROFESSIONAL SERVICE

7 BUSINESSES.— 

8 ‘‘(1) SHAREHOLDERS PROVIDING SERVICES TO

9 DISQUALIFIED S CORPORATIONS.— 

10 ‘‘(A) IN GENERAL.—In the case of any dis11 qualified S corporation, each shareholder of 

12 such disqualified S corporation who provides 

13 substantial services with respect to the profes14 sional service business referred to in subpara15 graph (C) shall take into account such share16 holder’s pro rata share of all items of income or 

17 loss described in section 1366 which are attrib18 utable to such business in determining the 

19 shareholder’s net earnings from self-employ20 ment. 

21 ‘‘(B) TREATMENT OF FAMILY MEMBERS.— 

22 Except as otherwise provided by the Secretary, 

23 the shareholder’s pro rata share of items re24 ferred to in subparagraph (A) shall be increased 

25 by the pro rata share of such items of each 

26 member of such shareholder’s family (within 


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1 the meaning of section 318(a)(1)) who does not 

2 provide substantial services with respect to such 

3 professional service business. 

4 ‘‘(C) DISQUALIFIED S CORPORATION.—For 

5 purposes of this subsection, the term ‘disquali6 fied S corporation’ means— 

7 ‘‘(i) any S corporation which is a 

8 partner in a partnership which is engaged 

9 in a professional service business if sub10 stantially all of the activities of such S cor11 poration are performed in connection with 

12 such partnership, and 

13 ‘‘(ii) any other S corporation which is 

14 engaged in a professional service business 

15 if the principal asset of such business is 

16 the reputation and skill of 3 or fewer em17 ployees. 

18 ‘‘(2) PARTNERS.—In the case of any partner19 ship which is engaged in a professional service busi20 ness, subsection (a)(13) shall not apply to any part21 ner who provides substantial services with respect to 

22 such professional service business. 

23 ‘‘(3) PROFESSIONAL SERVICE BUSINESS.—For 

24 purposes of this subsection, the term ‘professional 

25 service business’ means any trade or business if subVerDate Mar 15 2010 02:33 Jan 31, 2013 Jkt 029200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H348.IH H348

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1 stantially all of the activities of such trade or busi2 ness involve providing services in the fields of health, 

3 law, lobbying, engineering, architecture, accounting, 

4 actuarial science, performing arts, consulting, ath5 letics, investment advice or management, or broker6 age services. 

7 ‘‘(4) REGULATIONS.—The Secretary shall pre8 scribe such regulations as may be necessary or ap9 propriate to carry out the purposes of this sub10 section, including regulations which prevent the 

11 avoidance of the purposes of this subsection through 

12 tiered entities or otherwise. 

13 ‘‘(5) CROSS REFERENCE.—For employment tax 

14 treatment of wages paid to shareholders of S cor15 porations, see subtitle C.’’. 

16 (b) CONFORMING AMENDMENT.—Section 211 of the 

17 Social Security Act is amended by adding at the end the 

18 following new subsection: 

19 ‘‘(l) SPECIAL RULES FOR PROFESSIONAL SERVICE

20 BUSINESSES.— 

21 ‘‘(1) SHAREHOLDERS PROVIDING SERVICES TO

22 DISQUALIFIED S CORPORATIONS.— 

23 ‘‘(A) IN GENERAL.—In the case of any dis24 qualified S corporation, each shareholder of 

25 such disqualified S corporation who provides 


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1 substantial services with respect to the profes2 sional service business referred to in subpara3 graph (C) shall take into account such share4 holder’s pro rata share of all items of income or 

5 loss described in section 1366 of the Internal 

6 Revenue Code of 1986 which are attributable to 

7 such business in determining the shareholder’s 

8 net earnings from self-employment. 

9 ‘‘(B) TREATMENT OF FAMILY MEMBERS.— 

10 Except as otherwise provided by the Secretary 

11 of the Treasury, the shareholder’s pro rata 

12 share of items referred to in subparagraph (A) 

13 shall be increased by the pro rata share of such 

14 items of each member of such shareholder’s 

15 family (within the meaning of section 318(a)(1) 

16 of the Internal Revenue Code of 1986) who 

17 does not provide substantial services with re18 spect to such professional service business. 

19 ‘‘(C) DISQUALIFIED S CORPORATION.—For 

20 purposes of this subsection, the term ‘disquali21 fied S corporation’ means— 

22 ‘‘(i) any S corporation which is a 

23 partner in a partnership which is engaged 

24 in a professional service business if sub25 stantially all of the activities of such S corVerDate Mar 15 2010 02:33 Jan 31, 2013 Jkt 029200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H348.IH H348

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1 poration are performed in connection with 

2 such partnership, and 

3 ‘‘(ii) any other S corporation which is 

4 engaged in a professional service business 

5 if the principal asset of such business is 

6 the reputation and skill of 3 or fewer em7 ployees. 

8 ‘‘(2) PARTNERS.—In the case of any partner9 ship which is engaged in a professional service busi10 ness, subsection (a)(12) shall not apply to any part11 ner who provides substantial services with respect to 

12 such professional service business. 

13 ‘‘(3) PROFESSIONAL SERVICE BUSINESS.—For 

14 purposes of this subsection, the term ‘professional 

15 service business’ means any trade or business if sub16 stantially all of the activities of such trade or busi17 ness involve providing services in the fields of health, 

18 law, lobbying, engineering, architecture, accounting, 

19 actuarial science, performing arts, consulting, ath20 letics, investment advice or management, or broker21 age services.’’. 

22 (c) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to taxable years beginning after 

24 December 31, 2012. 

Æ 


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