Salary vs. Dividend

Marilyn owns all of Bell Corporations stock. Bell is a C corporation and employs 40 people. Marilyn is married, has two dependent children, and files a joint tax return with her husband. She projects that Bell will report $300,000 of pretax profits for the current year. Marilyn is considering four salary levels as shown below.

			Tax Liability
Total Income	Salary to Marilyn	Earnings Retained	Marilyn	Bell Corporation	Total
$300,000	$ -0-	$300,000
300,000	$ 100,000	200,000
300,000	200,000	100,000
300,000	300,000	-0-

Determine the total tax liability for Marilyn and Bell for each of the four proposed salary levels.

Assume no other income for Marilyns family, and assume that Marilyn and her husband claim a combined itemized deduction and personal exemption of $30,000.

Ignore employment taxes.

What recommendations can you make about a salary level for Marilyn that will minimize the total tax liability? Assume salaries paid up to $300,000 are considered reasonable compensation.

What is the possible disadvantage to Marilyn if Bell retains funds in the business and distributes some of the accumulated earnings as a dividend in a later tax year?