Question

Jill Meier is the sole owner of Meier Corp., which provides her only source of income. Jill has always paid herself entirely by drawling dividends from her corporation. A friend suggested that as long as she is earning about what she would have to pay someone else to run the business, she might be better off paying herself a salary instead of dividends, because she would avoid the problem of double taxation. If Jill’s company earns $120,000 all of which she will pay to herself, how much will she take home under each method? Assume a corporate tax rate of 30%, a personal tax rate of 25% and a 15% tax on dividends.

Answer 1

currently, Jill has to pay 30% x $120,000 = $36,000 in corporate income taxes

then, she must pay 15% x ($120,000 - $36,000) = $12,600 in dividend taxes

so her net pay = $120,000 - $36,000 - $12,600 = $71,400

if she decides to be an employee of her corporation, then she would pay only $120,000 x 25% = $30,000 in personal income taxes

so her net pay = $120,000 - $30,000 = $90,000

This calculation does not consider any FICA or FUTA taxes since I'm not sure where Jill lives and if those taxes apply there.