Working for Free: A New Tax Dodge for the Wealthy Magnifies Employment Tax Defects


Employment taxes account for an enormous share of federal tax receipts. And it is widely acknowledged that taxes on the self-employed are collected under a dysfunctional set of laws that is long overdue for repair. Yet, there is surprisingly little legal scholarship in the field. This article fills a portion of that gap. It examines some fundamental flaws that plague our nation’s employment tax laws, focusing on how President Bush’s dividend tax cut created an incentive for wealthy individuals to exploit those flaws at the government’s expense when they work for a corporation that they also own and control. Specifically, prior to the Bush tax cut the corporation would have (correctly) paid these employee-shareholders a salary for their labor. However, the corporation is now more likely to substitute a dividend for that compensation, preventing any employment tax from coming into play and shortchanging the social security trust fund at a time when its long term solvency is in jeopardy. The article proposes a new and practical framework for addressing the defects in the law in order to produce more sensible and equitable results while eliminating opportunities for abuse.


Business Organizations Law | Commercial Law | Law and Economics | Taxation-Federal | Tax Law

Date of this Version

March 2006