Blue is the owner of all of the shares of an S corporation, and Blue is considering receiving a salary of $110,000 from the business. She will pay the 7.65% FICA taxes on the salary, and the S corporation will pay the same amount of FICA tax. Blue reduces her salary to $50,000 and takes an additional $60,000 as a cash distribution. How would her Federal income tax liabilities change

Solution and Explanation:

The calculation of tax saving is shown below:

if B is getting the whole amount of salary the combined FICA tax liability of B and S Corp will be:

= $110000 multiply with 15.3 divide by 100

= $16830

If B is getting $50000 as salary the combined FICA tax liability of B and S corp will be

= $50000 multiply with 15.3 divide by 100

= $7650

thus the tax saving will be:

$16830 minus $7650

= $9180

The IRS can deem this arrangement unfit as make it mandatory for B to get the whole amount as salary. In that case, no change will take place in the tax liability.