Question

Jill Meier is the sole owner of Meier Corp., which provides her only source of income. Jill has always paid herself entirely by drawing 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 $220,000, all of which she will pay to herself, how much will she take home under each method? Assume a corporate tax rate of 33% and a personal tax rate of 22% on both salary and dividend income. Under dividends: $ ? Under salary: $ ?

Answer 1

Dividend Method: Under the Dividend method, the profit will be taxable under the hands of the Meier Corp (company) as a corporate tax on profits and Jill Meier (Dividend receiver) as a Personal tax on dividend income.The Calculation as follows

Dividend Method
Particulars	Amount in $
Total Earnings of the Company	220,000
Less: Corporate Tax Rate@33%	72,600
Amount available for dividend	147,400
Less: Personal Tax Rate@22%	32,428
Take-Home	114,972

Salary Method: Under Salary Method the amount will be taxable under the hands of Jill Meier because the whole amount of earnings of the company taken as a salary to her. So the profits of the company will zero. There is no corporate tax. The calculation as follows  

Salary Method
Particulars	Amount in $
Total Earnings of the Company	220,000
Less: Salary Paid	220,000
Net profit	-
Less: Corporate Tax Rate@33%	-
Amount Available for Dividend	-
Salary Received	220,000
Less: Personal Tax Rate@22%	48,400
Take Home	171,600