Walter D. Schwidetzky (Baltimore), Reforming Self-Employment Taxes, 185 Tax Notes Fed. 461 (Oct. 21, 2024):

In this report, Schwidetzky proposes reforms to address tax avoidance and other problems with self-employment tax.

Introduction
Taxpayers for decades have been seeking ways to avoid self-employment taxes. By self-employment taxes, I mean the taxes imposed by section 1401, which are more commonly known as Social Security taxes, Medicare taxes, and one of two so-called Obamacare taxes. Analogous provisions for employers and employees are contained in sections 3101 and 3111.

Obamacare taxes were added by the Affordable Care Act (P.L. 111-148) and the associated Health Care and Education Reconciliation Act (P.L. 111-152). One Obamacare tax is meant to fall on self-employment and employment income (and, in fact, is a type of Medicare tax). The other is (in the main) assessed on net investment income (NII) and thus is neither a self-employment tax nor an employment tax, but it is inextricably intertwined with those taxes. It seems clear that the two Obamacare taxes together were meant to apply to almost all taxable income of individuals (including income allocated to them by partnerships and S corporations), provided the incomes exceed certain thresholds. But the way these taxes are designed, taxpayers can potentially avoid both of them.

Likely the most common way taxpayers seek to avoid all of these taxes, often successfully, is through the use of an S corporation. But other entities have been used as well, though with much less success. The incidence of these taxes should not be a function of the entity that a taxpayer uses. This report looks at ways to reform these taxes so they might apply more uniformly and equitably. …

Conclusion
The Social Security Board of Trustees projects program costs to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. The estimated depletion date for the Medicare’s Hospital Insurance Trust Fund is 2036. To be sure, the reforms proposed by this report will not alone redress these problems, but they surely will help. Any solution should insist that all taxpayers pay their fair share of employment and self-employment taxes. Enacting the suggested reform proposals would ensure this will occur.

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