Now that the Senate has adopted a package pairing the minimum wage together with provisions to improve S corporation rules, one of the questions our Capitol Hill friends have asked us is, “Do S corporations pay the minimum wage?” The answer is an emphatic yes. While there are no studies to our knowledge that directly track the payment of minimum wages by businesses structured as S corporations (to be sure, there is little economic data on wage levels period), a couple of items demonstrate that S corporations are more likely to be adversely impacted by an increase in the minimum wage than other forms of business.

According to the IRS, S Corps represented three out of five corporations in 2003 (the last year numbers are available), but only received one dollar out of five. That means the average revenues for a C corporation is six times larger than the average revenues of an S corporation. All things being equal, the average S corporation will be harder hit by an increase in labor costs than the average C corporation.

Moreover, the incidence of minimum wage workers is dominated by industry type. For example, a professional services corporation is less likely to pay at or around the minimum wage than the local Wendy’s. Here’s the breakdown of S corporations in 2003 by industry from SOI (numbers have been rounded):

Agriculture, forestry, fishing, and hunting: 81,000

  • Mining 17,000
  • Utilities 3000
  • Construction 450,000
  • Manufacturing 150,000
  • Wholesale 190,000
  • Retail 375,000
  • Transportation & warehousing 103,000
  • Information 67,000
  • Finance and Insurance 135,000
  • Real Estate and Leasing 372,000
  • Professional and Scientific 513,000
  • Holding Companies 22,000
  • Waste and Remediation 168,000
  • Education 27,000
  • Health and Social Services 208,000
  • Arts and Entertainment 74,000
  • Food and Accommodation 188,000
  • Other Services 196,000

By number of firms, S corporations in minimum wage heavy sectors like agriculture, retail, education, health care services, and other services represent about 45 percent of all S corporations. By total receipts, the prevalence is greater — the retail and wholesale sectors alone comprise 42 percent of all S corporation receipts.

So while S corporations represent a broad swath of the business community, they are characterized by having significantly lower average revenues than C corporations while at the same time having a large presence in sectors more likely to pay the minimum wage. Providing them relief is consistent with the notion of targeting those business most likely to be affected, and it allows Congress to do so in a much broader manner than targeting one specific industry over another, since S corporations are represented in all industry types.

Wall Street Journal on the Tax Gap

Earlier this week, the Wall Street Journal weighed in on the tax gap debate, highlighting the challenge Congress faces as it attempts to address the tax gap in a constructive manner that does more good than harm. As the WSJ noted:

To put the tax gap in perspective, consider that the IRS took in tax receipts in fiscal 2005 of more than $2.2 trillion and that the overall U.S. tax compliance rate is about 85%. This isn’t perfect, but it also isn’t Italy. It’s especially good considering the U.S. tax system is based on voluntary compliance. Nina Olson, the IRS’s taxpayer advocate, told Congress last year that IRS auditors have found that an estimated 94% of noncompliance is the result of honest mistakes by tax filers who simply don’t understand the 17,000-page beast of a tax code.

The WSJ also highlighted the challenge S corporations face in warding off an unfair increase in payroll taxes.

Here’s another bad idea: Many doctors and lawyers who are incorporated under subchapter S will often pay themselves lower wages but higher dividends, in order to reduce self-employment taxes. The law is vague on the limits of this practice, and it is undoubtedly abused. But the Joint Tax Committee’s preferred solution is to make all professional income — even dividend payments — subject to self-employment taxes; this is nothing more than a backdoor tax hike.

The S Corporation Association does not advocate for businesses that fail to pay the proper amount of tax. But fixing tax gap is a complicated matter, and many of the proposals offered up to close the gap are just tax increases in disguise. The S Corporation Association has joined the Coalition for Fairness in Tax Compliance to help play a constructive role in the tax gap debate. This broad-based group includes the NFIB and US Chamber of Commerce and is going to be very active in the ongoing tax gap discussion. We’ll keep you apprised.