Jill Meier is the sole owner of Meier Corp., which provides her only source of i

Question

Jill Meier is the sole owner of Meier Corp., which provides her only source of income. Jill has always paid herself entirely by drawling 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 $120,000 all of which she will pay to herself, how much will she take home under each method? Assume a corporate tax rate of 30%, a personal tax rate of 25% and a 15% tax on dividends.

Explanation / Answer

Dividends (in thousands) Salary (in thousands) Income before payment to Jill $120 $120 Salary $120 Earnings before tax $120 0 Corporate tax (30%) $36 0 Earnings after corporate tax (paid as dividend) $84 0 Tax on dividend (15%) $12.60 - Tax on salary (25%) - $30 Payment (salary or dividend) minus taxes $71.40 $90

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