Question
Shelley is the sole shareholder and president of Zeth Corporation (a C corporation). She feels she is entitled to a $220,000 bonus this year because
Shelley is the sole shareholder and president of Zeth Corporation (a C corporation). She feels she is entitled to a $220,000 bonus this year because of her performance. However, rather than a bonus in the form of a salary, she plans to have Zeth pay her a $220,000 dividend. Because Shelleys marginal tax rate is 35%, she prefers to receive a dividend taxed at 15%. Her accountant, suggests a $310,000 bonus in lieu of the $220,000 dividend since Zeth Corporation is in the 34% tax bracket. Should Shelley take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Zeth and to Shelley. What if Zeth were an S corporation? How would your answer change?
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