A fair tax code fails if the largest fortunes can route around it. The Accord closes the conversion games that turn labor into capital gains, income into unrealized appreciation, inheritance into tax-free basis step-up, philanthropy into donor-controlled tax avoidance, and gifts into estate-tax escape.
Labor income escapes through entity form or contractor classification. A sole proprietor, an LLC member, an S-corp shareholder-employee, a platform contractor, and a W-2 employee can perform identical work and pay materially different effective rates depending purely on legal form. The S-corp shareholder-employee pattern is the most common: take a "reasonable salary" subject to payroll tax, then receive the rest of the entity's profit as a distribution that escapes payroll tax entirely. Multi-million-dollar S-corp profits are routinely structured this way.
Platform classification is the modern adjacent pattern. A worker delivering food, cleaning a home, or driving a passenger via a platform receives 1099 income — no employer-side payroll tax, no employer health-coverage obligation, no Social Security accrual on the employer side. The platform captures the cost savings; the worker bears the risk and the coverage gap.
The structural failure is that the substance of the work — performing labor for someone — is the same across all five forms. The legal form alone determines whether tax is collected. That's the definition of a tax-arbitrage opportunity, and it's been industrialized at scale.
Withholding and the payroll tax follow the substance of work, not the legal form. The substance test is binary: working in an entity (active participation) means the compensation is in the payroll tax base; not working in the entity (passive investment) means investment-tax treatment applies.
Pass-through-entity active participants pay payroll tax on the active-participation share of distributions. The remaining share — genuine investment return on contributed capital — pays income tax (and capital-gains convergence above the $10M lifetime CGAL) but not payroll tax.
Platform income is subject to source withholding by the platform operator, which pays the payroll tax employer share as the substance-over-form employer. The platform cannot characterize itself as a mere "marketplace" if it sets prices, controls dispatch, integrates with the worker's deliverables, or otherwise functions as the economic employer.
Contractor classification follows an economic-substance test emphasizing control (does the principal firm direct how the work is done?), integration (is the work integral to the firm's primary business?), and economic dependence (does the contractor primarily serve this one firm?). Misclassified relationships flow through payroll tax as W-2 employment; genuine independent contractors continue under self-employment rules.
S-corp shareholder-employees who today take low salaries and high distributions to suppress payroll tax. The "reasonable compensation" test is reframed: any active participant in the entity is in the payroll tax base on the substance of the work, with the legal split between salary and distribution becoming a labeling exercise rather than a rate-arbitrage tool.
Platform companies on the employer share of payroll tax for workers they substantively employ. The architecture removes the cost arbitrage that today makes platform classification more profitable than W-2 employment.
Principal firms that have misclassified workers as contractors. The substance test forces these relationships into W-2 treatment if the economic facts support it.
Genuine independent contractors who pass the economic-substance test. Solo professionals serving multiple clients, freelance consultants with diverse engagements, contract specialists who control their own work product — all continue under self-employment rules. The single-combined-remittance simplicity is preserved.
Passive investors in pass-through entities. Allocations to genuine passive participants — investors who contribute capital but not labor — are not in the payroll tax base. They pay income tax (and capital-gains rules above the lifetime CGAL) but not payroll tax on those distributions.
Small businesses paying ordinary wages to ordinary employees see no change. The S-corp shareholder-employee pattern that the architecture targets is specifically the high-distribution-low-salary pattern at the high end, not the typical small-business operator.
Pending canonical scoring.
Pass-through-platform closure has substantial standalone revenue at the top of the pass-through distribution. The largest S-corps (medical-professional groups, law-firm partnerships, hedge-fund management entities) carry enormous distribution volume that today escapes payroll tax. CRS estimates put the lost FICA revenue from S-corp distribution avoidance in the tens of billions per year.
Platform-classification closure has growing revenue as the platform-economy share of total US labor expands. Today's gig-and-platform workforce is in the millions; the architecture brings that workforce into the social-insurance base on the same footing as W-2 employees.
Combined with comprehensive withholding, wage-to-capital convergence, and the rate ladder, this stream is part of the income-side spine's closure architecture — the wage-to-capital subpage covers form-level conversion (ordinary income → cap gain); this subpage covers entity-level conversion (W-2 → S-corp distribution / 1099 / partnership allocation).
See tax ladder · fiscal scoring
- S-corp 'reasonable compensation' games
- Active-participation share of distributions enters the payroll tax base. The legal split between salary and distribution becomes a labeling exercise rather than a rate-arbitrage tool.
- Partnership special allocations
- Allocations lacking economic substance are recharacterized to the substance. The active participant pays payroll tax on the work-share; passive partners pay income tax on capital-share.
- Platform misclassification
- Economic-substance test forces platforms with control/integration/dependence to treat workers as W-2. Source withholding by the platform operator.
- 1099 contractor misclassification
- Same economic-substance test applies. Misclassified contractor relationships flow through payroll tax as W-2 employment; the principal firm pays the employer share.
- LLC owner-employee patterns
- Active-participation principle applies regardless of entity label. An LLC member working in the LLC pays payroll tax on the work-share of distributions.
The closures cover the named patterns. Detail rules continue to develop; the binary substance test is the architectural anchor.
- payroll tax
- payroll tax applies to compensation regardless of entity form. The active-participation share enters the base; the legal split between salary and distribution does not change the total.
- Comprehensive withholding base
- All compensation forms — including S-corp distributions, partnership allocations, platform income, and contractor service income — enter the same withholding base.
- Wage-to-capital conversion
- Form-level companion: this subpage covers entity-level form (W-2 vs S-corp vs platform); wage-to-capital covers rate-form (ordinary vs cap gain). Same substance principle, different application.
- Layered enforcement
- The corporation's compensation declaration (deduction at the entity level) is the audit basis for the recipient's payroll tax withholding (employee side). False statement at either layer is independently tax fraud.
- Self-employment levy
- Genuine independent contractors continue at the full 28.0% combined remittance. Same architecture, different remitter.
The pass-through-platform closure is the entity-level companion to the wage-to-capital subpage's form-level closure. Together they ensure that whoever is doing the work pays the levy on the work, regardless of the legal form that work flows through.
The architecture overrides the legal forms small businesses are entitled to use. S-corps, LLCs, and partnerships exist for legitimate reasons — liability protection, governance flexibility, investor relations. Imposing payroll tax on distributions undermines these forms' utility and chills entrepreneurship.
The architecture does not eliminate the entity forms. S-corps, LLCs, and partnerships continue to exist for liability protection, governance, and investor relations purposes. The change is at the tax-treatment layer only: the active-participation share of distributions pays payroll tax on the same footing as W-2 wages. Liability and governance benefits of the entity form are unaffected.
Genuine investment activity inside a pass-through entity continues to be taxed as investment. A passive investor in an LLC that operates a small business pays income tax on capital-share distributions, not payroll tax. The architecture distinguishes the labor-income inside a pass-through (which today escapes payroll tax) from the investment-return inside a pass-through (which is taxed as investment under the rate ladder + cap-gains convergence).
For genuinely small operators, the substance test produces the same outcome it always has: a sole-proprietor consultant with no employees and multiple clients pays self-employment levy as today; a small-business owner-operator with employees pays payroll tax on the active-participation share of profit, which closely tracks today's reasonable-compensation rule for S-corps. The change bites at the high end of pass-through distribution volume, not at small-business operations.