Joe is president and 75 percent owner of JS Corporation. He takes a salary of $825,000 this year. Presidents of comparable companies are generally paid no more than $500,000. What are the income and FICA tax consequences if $325,000 is determined to be excessive wages by the IRS? Assume Joe is in the 35 percent marginal tax bracket and JS Corporation is in the 34 percent marginal tax bracket.

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Quizplus · Accepted Answer

The Answer is Refund of Medicare taxes for both Joe and JS Corporation: $325,000 x .0145 = $4,713 each. Joe's income tax liability will be $65,000 [(35% - 15%) x $325,000] less because the reclassified amount will be taxed as a dividend. JS Corporation will pay $112,102 [.34 x ($325,000 + $4,713)] more in income taxes due to the loss of the $325,000 salary and related Medicare tax deductions.

Joe Is President and 75 Percent Owner of JS Corporation