Vermont Bar Journal, Vol. 40, No. 2 Spring 2014, Vol. 40, No. 1 | Page 29

Effect of Practice Structure
on Audit Profile

One change that is likely to occur, and
can increase the advantage of practicing as
a C corporation, is single payer health care.
As currently proposed in Vermont, single
payer health care is to be financed through
some form of payroll tax. Estimates of the
proposed tax range anywhere from a minimum prediction of 13% of payroll, by Sen.
Peter Galbraith, to an 18% rate prediction
attributed to Governor Shumlin’s office. In
the case of a self-employed individual the
health care tax would apply to Schedule C
income, and presumably would be deductible as an adjustment to his gross income,
just like health insurance is today. Thus, a
self-employed individual would be paying
payroll taxes on his single payer taxes.
The single payer rate could go even
higher than 18%. As Senator Galbraith recently said about the overall cost of single
payer health care, “If it turns out that the
figure is higher … then you would simply
adjust the rates up on the payroll tax.” Senator Galbraith was acknowledging the obvious: once the legislature has established
a new money tree, its reach is not limited to
the low hanging fruit.

Finally, one other consideration obtains
to your choice of the form for your practice:
your audit profile. The IRS has limited resources. Other than random audits to keep
taxpayers honest, it tries to conduct most
of its audits where it is most likely to garner
additional revenue. It bases these choices
on mathematical criteria and historical success rates. The mathematical criteria for individuals are gross receipts, not taxable income. The gross receipts from your practice are added to your other gross income
to determine your income differential score
(“diff” score). In addition, Schedule C businesses have historically been a fertile field
for tax adjustments. If you practice in a professional corporation you will substantially
lower your audit profile and decrease the
possibility of having to go through an audit—a headache we could all do without.
In all events, times have changed. The
focus of today’s budget battles is on how
to pay for the benefits that are funded by
payroll taxes and how to provide new benefits through payroll taxes. In a tax climate
in which federal payroll taxes have skyrocketed and new single payer payroll taxes are
on the horizon, it makes sense to reduce

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THE VERMONT BAR JOURNAL • SPRING 2014

the amount of your income that is subject
to payroll taxes. Practicing as a professional corporation is the way to accomplish this.
Whether you should practice as a C corporation or an S corporation depends upon a
comparison of the tax savings derived from
passing some income through shareholders of an S corporation with the tax savings
from tax-free fringe benefits available to
the shareholders of a C corporation.
____________________
John H.W. Cole, Esq., practices as a C
corporation in South Burlington, VT, and
concentrates his practice in the areas of tax
planning, and qualified retirement plans.
Mark E. Melendy, Esq., is a member of Melendy Moritz PLLC, with offices in Hanover,
NH, and Woodstock, VT, where he concentrates his practice in the areas of estate
planning, business planning, estate administration, and real estate.
____________________

Practice Sturcture Can Save Taxes

Vermont Single Payer
Health Insurance Funding

As used in this article the term corporation includes an entity electing to be treated as corporation for tax purposes. An LLC, for example,
may elect to be taxed as a corporation. The term
partnership includes entities taxed as a partnership, such as an LLC or LLP.
2
2% or less shareholders of an S corporation
do not have to pass through their cost of health
insurance.
1

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