Question

Anna's creations is a craft store organized as a c corporation. anna is the sole shareholder of the corporation. she works full time for the corporation and receives a salary of $62,000. which of the following correctly describes the federal income tax treatment of this salary at the entity and individual levels? anna's salary is:

A. included in taxable income at the entity level. it is included in wage income on anna's individual return.
B. deducted from taxable income at the entity level. it is included in wage income on anna's individual return.
C. deducted from taxable income on the corporation's tax return. it is included as pass-through income on schedule e of anna's individual return.
D. deducted from taxable income on the corporation's tax return. it is not taxable on anna's individual return.

Answer 1

Anna's salary from her C corporation is deductible as an operating expense on the corporate tax return, but is reported as wage income on her personal tax return, not as pass-through income. The corporation pays corporate income tax, while Anna pays income tax on her salary along with her share of payroll taxes.

Step-by-step explanation:

Anna's salary from Anna's Creations, a C corporation where she is the sole shareholder and also an employee, will have specific federal income tax implications.

At the corporate level, Anna's salary is considered an operating expense and therefore is deductible from Anna's Creations' taxable income, reducing the corporation's taxable income. However, on Anna's personal tax return, her salary from the corporation is reported as wage income, not pass-through income, and she will include it on Form 1040, not Schedule E.

Furthermore, the corporation will be responsible for paying corporate income tax on its profits. Anna, as an employee, will owe individual income tax on her salary. Additionally, both Anna and the corporation will jointly be responsible for payroll taxes on her salary, which include contributions to Social Security and Medicare.