Under a new proposal making its way through the House, small law firms could find themselves paying higher payroll taxes. Targeted by the legislation is the so-called “John Edwards” loophole, under which an individuals could register a small firm as an S-corporations with himself as the sole shareholder. Using this method, that person could receive a relatively small salary but collect a large amount of profit as a shareholder rather than an employee, thus avoiding thousands of dollars in payroll tax. During the 2004 presidential campaign, Edwards was criticized for doing just that.
Closing the loophole, house aides say, could raise as much as $10 billion per year. Opponents counter that changing the tax law now would stifle small-business activity in an already weakened economy.
