Professor Richard Winchester reports:
"My most recent article on the employment tax (The Gap in the Employment Tax Gap, 20 Stan. L. & Pol'y Rev. 127 (2009)) is cited in a May 28, 2010 report prepared by the staff of the two Congressional tax writing committees. The report describes the provisions of pending tax legislation that was passed by the House on that same day. One revenue raiser is a scaled down version of a proposal I first described in a 2006 article on the employment tax. A 2008 Congressional report cited that article and my proposal as one possible direction for employment tax reform.
Under the pending legislation, an individual would be required to pay Social Security and Medicare tax on their share of the profits of certain S corporations that they own and work for. Right now, such employee-owners can sidestep the Social Security and Medicare tax if the firm pays them a dividend (or something else, or nothing at all) instead of "wages" for their work. John Edwards attracted widespread criticism when it was reported that he used this technique to avoid paying tax he would otherwise owe if he practiced law as either a sole proprietor or as a general partner in a law partnership. The pending legislation is specifically targeted at this kind of abuse. My proposal is similar to the measure included in the bill, but it would cover a wider range of cases, including employee-owners of closely-held C corporations. "