To amend the Internal Revenue Code of 1986 to allow all employees of a firm to be counted as a single shareholder toward the shareholder limit of an S corporation.

To amend the Internal Revenue Code of 1986 to allow all employees of a firm to be counted as a single shareholder toward the shareholder limit of an S corporation. 1. Employees of a firm counted as a single shareholder toward shareholder limit of S corporation (a) In general Subsection (c) of section 1361 (7) Employees treated as one shareholder (A) In general For purposes of subsection (b)(1)(A), in the case of a corporation which has only employee shareholders, there shall be treated as one shareholder all employees (and their estates) of a corporation and any wholly owned business entities (as determined by the Secretary) of such corporation. (B) Employee defined For purposes of this paragraph— (i) In general The term “employee” means any individual (whether a resident alien, nonresident alien, or citizen) that would be an employee described under section 3121(d) (1) or (2). (ii) Certain determinations with respect to spouse disregarded In making the determination whether a corporation has only employee shareholders, any current ownership in stock by a spouse of an employee by reason of a State community property law or other similar Federal, State, or foreign country law, shall be disregarded. . (b) Exception to nonresident shareholder prohibition Subparagraph (C) of section 1361(b)(1) of such Code is amended to read as follows: (C) have a nonresident alien as a shareholder (except for a nonresident alien that is a shareholder by reason of subsection (c)(7) or a nonresident alien spouse of an employee which is a shareholder in a corporation described in subsection (c)(7)), and . (c) Withholding with respect to nonresident aliens Section 1373 of such Code is amended by adding at the end the following: (c) Withholding with respect to nonresident aliens The principles of sections 1441 and 1446 shall apply to income allocable to, and distributions to, a nonresident alien shareholder of an S corporation (allowed by reason of section 1361(b)(1)(C)). The Secretary may prescribe regulations to carry out the purposes of this subsection. . (d) Defining items of income for purposes of withholding tax on nonresident aliens Subsection (b) of section 1441 of such Code is amended by inserting before the period at the end of the first sentence the following: , and any items of income described in section 1366(a) allocable to a nonresident alien that is an S Corporation shareholder by reason of section 1361(c)(7) (e) Effective date The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

Summary: This bill amends the Internal Revenue Code, with respect to the limit on the number of shareholders of an S corporation, to: (1) allow employees (and their estates) of the S corporation and any wholly owned business entities of the corporation to be treated as one shareholder if the corporation only has employee shareholders; (2) allow nonresident aliens to be shareholders if the nonresident alien is an employee, or the spouse of an employee, of such a corporation; and (3) establish tax withholding requirements for nonresident aliens who are permitted to be shareholders under this bill.