Oak Inc., a C corporation, reports taxable income of $100,000 before paying salary to its sole...
Oak Inc., a C corporation, reports taxable income of $100,000 before paying salary to its sole shareholder, Sue. Her marginal tax rate on ordinary income is 22 percent and 15 percent on dividend income. If Oak pays Sue a salary of $75,000 but the IRS determines that Sue’s salary in excess of $40,000 is unreasonable compensation, what is the amount of the overall tax (corporate level + shareholder level) on Oak’s $100,000 pre-salary income (ignore the net investment income tax)? Assume Oak’s tax rate is 21% and it distributes all after-tax earnings to Sue. Use the following chart to complete your answer.
With $40,000 SalaryDescription
1) Taxable income before salary (1) – (2)
(2) Salary (3)
Taxable income (1) – (2
4) Entity tax
(5) After-tax entity earnings
(6) Sue’s tax on dividends
(7) Sue’s tax on salary
(8) Overall tax(
9) Overall tax rate
Homework Answers
Overall tax is computed as follows:
| With $40,000 salary | Description | |
| (1) Taxable Income before salary | $100,000 | |
| (2) Salary | $40,000 | |
| (3) Taxable income | $60,000 | (1) - (2) |
| (4) Entity tax | $13,200 | (3) * 22% |
| (5) After tax entity earnings | $46,800 | (3) - (4) |
| (6) Sue's tax on dividends | $7,020 | (5) * 15% |
| (7) Sue's tax on salary | $8,800 | (2) * 22% |
| (8) Overall tax | $29,020 | (4) + (6) + (7) |
| (9) Overall tax rate | 29.02% |
(8)/(1) * 100 |
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