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Chapter 30: Problem 5

If an individual owns a corporation for which he is the only employee, which different types of federal tax will he have to pay?

Short Answer

Expert verified
In conclusion, an individual who owns a corporation for which he is the only employee will have to pay the following types of federal taxes: 1. Corporate income tax (as the owner of the corporation) 2. Personal income tax on salary (as the employee) 3. Employee portion of FICA taxes (as the employee) 4. Employer portion of FICA taxes (as the corporation) 5. Federal unemployment tax (FUTA) (as the corporation)

Step by step solution

01

Identify the two roles of the individual

In this scenario, the individual plays two roles: the owner of the corporation and the only employee. We need to determine the federal taxes applicable to both roles.
02

Identify taxes for the owner of the corporation

As the owner of the corporation, the individual will have to pay corporate income tax. The United States imposes a flat corporate tax rate on the taxable income of all corporations.
03

Identify taxes for the employee

As the only employee of the corporation, the individual will be subjected to personal income tax on the salary received from the corporation. Alongside personal income tax, the individual will also be responsible for the employee portion of Social Security and Medicare taxes, known as FICA (Federal Insurance Contributions Act) taxes.
04

Identify additional taxes for the corporation (employer portion)

The corporation, as the employer, is responsible for the employer portion of Social Security and Medicare taxes (FICA taxes). Additionally, the corporation must pay federal unemployment tax (FUTA) to provide for payment of unemployment compensation to workers who have lost their jobs.
05

Summary of federal taxes

In conclusion, an individual who owns a corporation for which he is the only employee will have to pay the following types of federal taxes: 1. Corporate income tax (as the owner of the corporation) 2. Personal income tax on salary (as the employee) 3. Employee portion of FICA taxes (as the employee) 4. Employer portion of FICA taxes (as the corporation) 5. Federal unemployment tax (FUTA) (as the corporation)

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