Senate May Soon Consider New Small Business Tax Wrongly Characterized as Tax Loophole

Date: July 14, 2022

In the coming weeks, the U.S. Senate will move forward with the “Build Back Better Act,” including a new tax on Small Business

Updated: July 20, 2022 

Thanks to the action of NFIB members, many harmful small business policies were successfully removed from earlier versions of Congress’ Build Back Better Act. But now, the U.S. Senate is reportedly ready to consider a revived Build Back Better Act in the coming days. To finance this spending plan, those at the bargaining table had agreed to include a new 3.8% tax on passthrough businesses, also known as the Small Business Surtax, wrongly characterized as closing a ‘loophole’ to help fund Medicare. Currently, the Senate has paused negotiations that include tax policies until further inflation data is released, however, the tax increase proposal is likely to return in future legislation. 

“This plan to implement this new tax is a direct attack on Main Street when they can least afford it,” said NFIB Vice President of Federal Government Relations Kevin Kuhlman. “With excessive inflation, high gas prices, worker shortages, and supply chain disruptions, a tax increase incorrectly masked as closing a ‘loophole’ or ‘funding Medicare’ is not only problematic, but it will further destabilize the small business economy. Congress should immediately reject this anti-small business provision and NFIB will actively work against its passage.”

Some claim that small business owners do not pay Medicare taxes, but all employers pay Medicare taxes in the form of payroll taxes on their employees’ wages and self-employment taxes on their own compensation.

Lawmakers’ argument that this is just a tax on high-income individuals is also false. For businesses organized as pass-through entities like sole proprietorships, LLCs, and others, business income is included on a business owner’s individual IRS Form 1040. However, filing a 1040 as a business owner is different than filing a 1040 with your personal income from a W-2, 1099, or other typical income. Pass-through business income and profits reported on a Form 1040 is more often the money small businesses use to operate, invest in employee benefits, hire in a tight labor market, expand a business, or save for future challenges like a recession.

For example, a small business owner with $600,000 in business income does not take home that money, but instead is re-investing it into their business. Further, the new small business tax applies to all business income above $400,000 (individual filers) and $500,000 (joint filers). The threshold is even lower for family businesses held as trusts, with the tax applying to income above $13,000. The thresholds in the new Build Back Better Act small business tax are not indexed for inflation, so the tax will hit an increasing number of small business owners and an increasing percentage of pass-through business income every year.

Learn more about the new tax and what NFIB is doing to fight it at tell your Senators to stand up for small businesses and say no to this new small business tax.


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