Carol has recently incorporated her sole proprietorship and is considering making an S election....

Question:

Carol has recently incorporated her sole proprietorship and is considering making an S election. The corporation has $200,000 of gross revenue and expenses of $75,000 before Carol's salary. She plans to take a gross salary of $60,000 from the business and this will be her only income for the year. Compare the total tax burden for Carol and the corporation with and without the S election. Consider both income and employment taxes. Carol is single and does not itemize her deductions. She plans to reinvest all of the corporation's net income after taxes into the business. Based on tax burden alone for 2014, should Carol make the Selection?

Definition of taxable income.

Taxable income is also known as gross income. It can be defined as the amount of money paid by a person or some a company to the government in a particular period of time. It usually comprises of income items and is reduced by expenses and other deductions.

Answer and Explanation:

Regular C Corporation: FICA tax on Carol's $60,000 salary is $4,590 ($60,000 x7.65%).

FUTA = $434 ($7,000 x 6.2%)Corporate taxable income = $200,000 - $75,000 - $60,000 salary - $4,590 FICA -$434 FUTA= $59,976.

Income tax on $59,976 = ($50,000 x 15%) + ($9,976 x 25%) = $7,500 + $2,494 =$9,994.

Total corporate taxes = $4,590 + $434 +$9,994 = $15,018.

Carol's taxes: Carol also pays $4,590 in FICA taxes on her salary.

Carol's taxable income = $60,000 - $5,450 standard deduction - $3,500 personalexemption = $51,050.

Income tax on $51,550 = (8,025 x 10%) + ($24,525 x 15%) + ($18,500 x 25%) =$802.50 + $3,678.75 + $4,625 = $9,106.25.

Carol's total taxes = $9,106.25 + $4,590 = $13,696.25.Total taxes = $15,018 + $13,696.25 = $28,714.25

S Corporation:

FICA tax on Carol's $60,000 salary is $4,590 ($60,000 x 7.65%).

FUTA = $434 ($7,000 x 6.2%).The net S corporation income of $59,976 (same as the regular corporation) is passed through to Carol for taxation along with her salary income.

Carol's taxable income = $60,000 salary + $59,976 corporation income - $5,450 standard deduction - $3,500 exemption = $111,026.

Tax on Carol's $111,026 taxable income = ($8,025 x 10%) + ($24,525 x 15%) +($46,300 x 25%) + ($32,176 x 28%) = $802.50 + $3,678.75 + $11,575 + $9,009.28= $25,065.53

Carol's total tax = $25,065.53 + $4,590 = $29,655.53

Total taxes = $29,655.53 + $4,590 +$434 = $34,679.53

Based on 2014 total taxes only, Carol should not make the S corporation election because the total taxes will be $5,965.28 ($34,679.53 - $28,714.25) less operating as regular C corporation.


Learn more about this topic:

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How to Calculate Corporate Taxable Financial Income

from Accounting 202: Intermediate Accounting II

Chapter 8 / Lesson 2
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