Jill Meier is the sole owner of Meier Corp which provides he

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.

Solution

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