Carol has recently incorporated her sole proprietorship and is considering makin
ID: 2743671 • Letter: C
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 Carols 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 2015, should Carol make the S election?
Explanation / Answer
Regular Corporation:
FICA tax on Carol’s $60,000 salary is $4,590 ($60,000 x 7.65%).
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 - $4,850 standard deduction - $3,100 personal exemption = $52,050. Income tax on $52,050 = (7,150 x 10%) + ($21,900 x 15%) + ($23,000 x 25%) = $715 + $3,285 + $5,750 = $9,750.
Carol’s total taxes = $9,750 + $4,590 = $14,340.
Total taxes = $15,018 + $14,340 = $29,358.
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 - $4,850 standard deduction - $3,100 exemption = $112,026.
Tax on Carol’s $112,026 taxable income = ($7,150 x 10%) + ($21,900 x 15%) + ($41,300 x 25%) + ($41,676 x 28%) = $715 + $3,285 + $10,325 + $11,669 = $25,944
Carol’s total tax = $25,944 + $4,590 = $30,584
Total taxes = $30,584 + $4,590 +$434 = $35,608. Based on 20014 total taxes only,
Therefore, Carol should not make the S corporation election