As the push for tax reform starts to gel, the Democrats have one proposal so far that we’ve heard batted around in the past: reforming how S-Corporation owners take money out of the corporation.

Today, many S-Corp owners draw a nominal salary, and take the rest of their cash out of the company as distributions, which are not subject to Social Security, Medicare, or Unemployment taxes.  This question of “reasonable compensation” has been a more frequent audit item in recent years.

The Democrats would like to see personal service S-Corps, like real estate agents, accountants, attorneys, and the like pay self-employment taxes on all of the profits of the S-Corp as long as 75% of the revenue was generated by 3 or fewer shareholders.  This tax would be applied at the individual shareholder level to those with AGI on their personal return of $250,000 married filing joint, or $200,000 single. The same treatment would apply to partners in personal service partnerships.

The Republicans quashed this during the 2012 session, but it is expected to find more traction as overall tax reform is taken up early next year, especially given the desire to lower overall income tax rates, and the questionable health of the Social Security Trust Fund.