P1 (30 points): Based on your classes here at Stanford, you decided to open up a
ID: 1150955 • Letter: P
Question
P1 (30 points): Based on your classes here at Stanford, you decided to open up a small software programming company on the side. Your small firm (ie., you) has been moderately successful and produces a taxable income of $65,000 annually after all "ordinary and necessary" expenses and depreciation have been deducted. At present, you are operating as a sole proprietorship. Essentially, you pay income tax on the entire $65,000 of income. For tax purposes, you might as well have another job that pays you $65,000 per year. firm. If you do, you will pay One alternative that you have is incorporating your boutique yourself a modest salary of $22,000 per year from the company. The company will then pay taxes on the remaining $43,000 and retain the balance as a corporate asset (still owned by you). Thus, your two alternatives are to operate the business as a proprietorship or a corporation. You are single and can claim $8,000 of personal deductions on your federal taxes. Which alternative will result in a smaller total payment to the government? Assume that the federal tax rate for individuals is 16% for the first $35,000 of income and 22% thereafter. The individual state income tax rate is 10%. The combined federal and state income tax rate for corporations is 16.1%.Explanation / Answer
Tax payment in case of the sole proprietorship: ?
Tax payment in case of the Corporation: ?
Hence, the tax payable is less in case if he incorporates the firm and takes salary.
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