To amend the Internal Revenue Code of 1986 and the Social Security Act to provide for employment tax treatment of professional service businesses.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Narrowing Exceptions for Withholding 
Taxes Act of 2012''.

SEC. 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' 
                means--
                            ``(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' means any 
        trade or business if substantially all of the activities of 
        such trade or business 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.
            ``(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) of the Internal Revenue Code of 1986) 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' 
                means--
                            ``(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' means any 
        trade or business if substantially all of the activities of 
        such trade or business 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.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2011.

Summary: Narrowing Exceptions for Withholding Taxes Act of 2012 - 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.