Mary (Who is single with no dependants and who does not itemize) owns 100% of Beezer Tweezer Co, which is organized as a C-Corporation. Beezer Tweezer has $400,000 of taxable income in 2011 and Mary has $34,500 of outside taxable income before any wage compensation from Beezer Tweezer. Assuming reasonable compensation for Mary's services to Beezer Tweezer would fall in the range of $150,000 to $250,000, which of the following wage distribution amounts to Mary would result in the lowest overall combined tax liability (For Mary and Beezer Tweezer)?
D) Taking no wages from Beezer Tweezer.
The $400,000 of taxable income to the corporation doesn't affect Mary's personal income because the corporation pays its own taxes even though Mary is the sole owner. Mary has $34,500 in taxable income from other sources and can take income from $150,000 to $250,000. If she takes the lowest amount, her total taxable income is $34,500 + $150,000 = $184,500. Mary was single in 2011, so this income would put her in the 33% tax bracket. Her total tax would be $184,500 x 33% = $60,885 plus additional tax as applicable to her individual return. We would want her to choose D - take no wages from the company because her minimum liability would be $60,885. However, the IRS would certainly audit her return ...
This solution provides the correct answer with complete explanation and all needed calculations to the tax liability problem presented. Includes 2 references (one from Wikipedia).