Narrowing Exceptions for Withholding Taxes Act of 2013

To amend the Internal Revenue Code of 1986 and the Social Security Act to provide for employment tax treatment of professional service businesses. 1. Short title This Act may be cited as the Narrowing Exceptions for Withholding Taxes Act of 2013 2. Employment tax treatment of professional service businesses (a) In general Section 1402 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection: (m) Special rules for professional service businesses (1) Shareholders providing services to disqualified S corporations (A) In general In the case of any disqualified S corporation, each shareholder of such disqualified S corporation who provides substantial services with respect to the professional service business referred to in subparagraph (C) shall take into account such shareholder’s pro rata share of all items of income or loss described in section 1366 which are attributable to such business in determining the shareholder’s net earnings from self-employment. (B) Treatment of family members Except as otherwise provided by the Secretary, the shareholder’s pro rata share of items referred to in subparagraph (A) shall be increased by the pro rata share of such items of each member of such shareholder’s family (within the meaning of section 318(a)(1)) who does not provide substantial services with respect to such professional service business. (C) Disqualified S corporation For purposes of this subsection, the term disqualified S corporation (i) any S corporation which is a partner in a partnership which is engaged in a professional service business if substantially all of the activities of such S corporation are performed in connection with such partnership, and (ii) any other S corporation which is engaged in a professional service business if the principal asset of such business is the reputation and skill of 3 or fewer employees. (2) Partners In the case of any partnership which is engaged in a professional service business, subsection (a)(13) shall not apply to any partner who provides substantial services with respect to such professional service business. (3) Professional service business For purposes of this subsection, the term professional service business (4) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations which prevent the avoidance of the purposes of this subsection through tiered entities or otherwise. (5) Cross reference For employment tax treatment of wages paid to shareholders of S corporations, see subtitle C. . (b) Conforming amendment Section 211 of the Social Security Act is amended by adding at the end the following new subsection: (l) Special rules for professional service businesses (1) Shareholders providing services to disqualified S corporations (A) In general In the case of any disqualified S corporation, each shareholder of such disqualified S corporation who provides substantial services with respect to the professional service business referred to in subparagraph (C) shall take into account such shareholder’s pro rata share of all items of income or loss described in section 1366 of the Internal Revenue Code of 1986 which are attributable to such business in determining the shareholder’s net earnings from self-employment. (B) Treatment of family members Except as otherwise provided by the Secretary of the Treasury, the shareholder’s pro rata share of items referred to in subparagraph (A) shall be increased by the pro rata share of such items of each member of such shareholder’s family (within the meaning of section 318(a)(1) (C) Disqualified S corporation For purposes of this subsection, the term disqualified S corporation (i) any S corporation which is a partner in a partnership which is engaged in a professional service business if substantially all of the activities of such S corporation are performed in connection with such partnership, and (ii) any other S corporation which is engaged in a professional service business if the principal asset of such business is the reputation and skill of 3 or fewer employees. (2) Partners In the case of any partnership which is engaged in a professional service business, subsection (a)(12) shall not apply to any partner who provides substantial services with respect to such professional service business. (3) Professional service business For purposes of this subsection, the term professional service business . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2012.

Summary: Narrowing Exceptions for Withholding Taxes Act of 2013 - Amends the Internal Revenue Code and title II (Old-Age, Survivors, and Disability Insurance Benefits) of the Social Security Act to require a shareholder of a subchapter S corporation engaged in a professional service business to include all items of income or loss attributable to such business in determining such shareholder's net earnings from self-employment for purposes of computing employment tax liability. Defines a "professional service business" as any trade or business substantially all of the activities of which involve providing services in the fields of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services.