Mike Barton owns Barton Products,Inc. The corporation has 30 employees. Barton c
ID: 2697609 • Letter: M
Question
Mike Barton owns Barton Products,Inc. The corporation has 30 employees. Barton corporation expects 800,000.00 of net income before taxes in 2012. Mike is married and files a joint return with his wife,Elaine, who has no earnings of her own. They have one dependant son, who is 16. Mike and Elaine have no other income and do not itemize. Mike's salary is 180,000.00 per year(already deducted in computing Barton Corporations 500,000.00 net income). Assume that variations in salaries will not effect the US production activities deductions already reflected in taxable income.
Tasks:
A. Should Mike increase his salary by 50,000.00 to reduce the overall tax burden to himself and Barton Products? Because of the social security cap, the corporation and MIke each would incur a 1.45% pal tax with the corporate prtion being deductible.
B. Should Barton corporation employ Elaine for 50,000.00 rather than increase Mike's salary? Take into consideration employment taxes and federal taxes. Note that Elaine's salary would be well below the social scuriy cap, so that she and the corporation would each incur the full amount of payroll taxes with the corporate portion being deductible. In 2012, Elaine's portio is 5.65%, and the corporations is 7.65%. After 2012, Elaine's portion i 7.65%.
Answer in detail and show all calculations
Explanation / Answer
A) Corporate tax is equal to Profit befor tax less profit after tax = 800000 - 500000 = 300000
corporate tax rate = (300000/800000)*100 = 37.5 %
Now when salary of Mike is increased by 50000 the barton corporate will get a deduction of 50000 from taxable income along with that barton corporation have to pay 1.45% of 50000 as pal tax which will also be deductible from taxable income.
So net reduction in taxable income in the hands of barton corporate =
50000*(37.5/100) - (1.45/100)*50000 + 37.5%*1.45%*50000
= 18750 - 725 + 271.875
= 18296.875
Additional pal tax payable by Mike = 1.45/100 * 50000 = 725
Net reduction in overall tax liablity will be 18296.875 - 725 = 17571.875
Conclusion yes mike should increase his salary by 50000 to decrease overtax liablity by 17571.875
B) Now if Elaine is employed then tax payable by elaine in 2012 = 50000*(5.65/100)
= 2825
Tax payable by corporation = (7.65/100)*50000 = 3825
Tax saving for corporation = (50000+ 3825)*(37.5/100) = 20184.375
Net tax saving will be 20184.375 - (3825+2825) = 13534.375
So in 2012 it would be better to give extra 50000 as salary to Mike as it would result in additional benefit of 17571.875 - 13534.375 = 4037.50
Now 2012 Onwards,,,,
Tax payable by elaine = 50000 *(7.65/100) =3825
Tax payable by corporation = (7.65/100)*50000 = 3825
tax saving for corporation = (50000+3825)*(37.5/100) = 20184.375
net tax saving = 20184.375 - (3825+3825) = 12534.375
Hence after 2012 also it would be better to Give more 50000 as salary to mike to reduce overall tax burden.