Marsha is ready to start a new business that will generate about $150,000 of earnings each year. Marsha will work full time for the business. Her plan is to withdraw $100,000 of earnings from the business each year to fund her personal needs. She will leave the remaining earnings in the business to retire debt and fund future needs of the business. Marsha wants to minimize the overall tax bite on these earnings. What will be the total entity and personal tax cost under each of the following scenarios, assuming Marsha’s ordinary income tax rate is 25 percent, her dividend rate is 15 percent, and the applicable self-employment/payroll tax rate is 15.3 percent? Ignore all potential state income tax consequences.
1. Marsha’s business is a C corporation that distributes Marsha a $100,000 dividend each year.
2. Marsha’s business is a C corporation that pays Marsha a salary of $100,000 each year for services she renders to the corporation?
3. Marsha’s business is an S corporation that pays Marsha a $40,000 salary each year and distributes a $60,000 dividend to Marsha each year.
4. Marsha’s business is a limited liability company that is taxed as a partnership. Marsha owns 90 percent of the business, and Joe, an investor who does not work in the business, owns the remaining 10 percent. The LLC distributes $90,000 to Marsha each year and $10,000 to Joe. Assume Joe’s marginal tax rate is also 25 percent.