The Vanity Corporation organized and began operations in January. The corporatio

Question

The Vanity Corporation organized and began operations in January. The corporation's ten equal shareholders elect to have Vanity taxed as an S corporation, and the election and necessary consents are filed in a timely manner. For its first tax year ended December 31, Vanity has ordinary income of $64,000 and short-term capital gains of $16,000. During the year, it distributes $30,000 in cash equally to its ten shareholders. For the year, how much income should each shareholder report and how should it be characterized?

Explanation / Answer

Employee salaries are subject to FICA tax (Social Security & Medicare tax) --currently 13.3 percent--(4.2% Social Security paid by the employee; 6.2% Social Security paid by the employer; 1.45% employee medicare and 1.45% employer medicare). The distribution of the additional profits from the S corporation will be done without any further FICA tax liability. So Here Ordinary Income is 64000. So it will be considerd as each Equal shareholder has a Business income of $64000/10 = $6400 each

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