Businesses always wish to file their tax returns in a tax-efficient manner and using a way

that helps them achieve the minimum tax cost through their operations. However, the payment of

Tax Corporation is not similar in all organizations and is applied differently on the different

levels and types of procedures. These other tax returns on corporations affect the
management's

undertaking, and the owner is withdrawing cash and affects the employees. The goal of the

taxation in settling its shareholders is to ensure that they avoid the double tax experienced in the

payment of dividends. However, the client should not worry about the double dividend taxation

since his corporation is classified as an S-corporation. According to the IRC taxation, the

company has a C corporation's legal and business advantage and holds a tax advantage in a

partnership (Merritt, 2021). An S corporation avoids payroll taxes and unemployment taxes in

their dividend distribution since they must pay reasonable compensation to the employees,

subject to employment taxes (Keightley, 2013). However, the appropriate balance should match

the market return to the services provided by the employee for the corporation to avoid taxes

before dividend distribution.

Considering the IRS laws governing the S corporation tax returns and its effects of tax

liabilities on the owners and the shareholders, they should consider dividing the client's salary
of

$180000 into salary and dividends. At the same time, it continues to pay the daughter $70000.

Also, for the daughter to continue receiving a reasonable salary according to the specification

given by the IRS, she must continue having 40% of the total ownership of the corporation.

Payment of salaries and dividends are ways of withdrawing cash from a corporation

while incurring minimum tax costs. The business being an S corporation is exempted from

payment of corporate-level income taxes. However, the shareholders in the organization are

treated as employees similar in a partnership. Thus they are held liable to tax returns on their

salaries subject to federal withholding and FICA taxes (Nitti, 2014). The corporation should

deduct wages paid to the employees and pay employment taxes, withholding income, and payroll

taxes. However, since dividends tax treatment is different from salary because dividends are

returns on investment and are born out of the profits made by the business, they are subject to

income tax return but exempted from self-employment taxes.

S corporations are exempted from paying corporate taxes, but the operating income is

passed through to the shareholder, while capital gains are passed through separately (Merritt,

2021). However, they must pay reasonable compensation, which means that the corporation

cannot pay the client more than $180000 since it would attract high taxes. Therefore, the client

should divide the payment into salary and dividends to reduce the tax liability to avoid paying

higher taxes. The daughter should continue receiving $70000 since she has a lower income

bracket than the client, and the percentage of ownership will remain at 40%. This means that she

will continue receiving reasonable income, enabling the corporation to continue enjoying the tax

benefits of not paying the corporate-level income taxes.

However, the treatment of salaries and dividends in S corporation affects the shareholders

and the owners differently. Since the operating income computed at the corporate levels is

passed through to the shareholders while capital gains are not, the shareholders in an S

corporation prefer dividends under the capital gains classification than the payments of salaries.

Salaries attract payroll taxes, which means they attract taxes as income from the owner and are

taxed when received by the shareholder (Keightley, 2013). However, dividends in an S

corporation do not attract double taxation; thus, they are a source of tax efficiency to the

corporation. Therefore, the client would prefer payment of dividends to shareholders than

salaries.

However, even after paying the dividend, the client would still attract taxes capped at a

21% tax rate on capital gains. The 21% tax rate deducted from the tips is fair to the client

because the other option would cost him a tax rate of 39.6% due to the federal income tax

requirements, which are attached to the salary payment of the clients (Nitti, 2014). Therefore, the

client's payments are not within reasonable compensation, subject to payroll taxes and

unemployment taxes. However, $70,000 paid to the daughter is within fair compensation thus

does not incur any cost of being subjected to payroll taxes and unemployment taxes. Also, since

S corporation shareholders are not subject to self-employment taxes, she only pays the tax when

expenses are deducted. Shareholders in an S corporation do not also pay employment taxes,

withholding income, and payroll taxes since it is an obligation undertaken by the corporation.
Therefore, $70000 to the daughter as salary or dividends doesn't affect her compensation,
given

that she is paid within reasonable compensation evaluation. Thus, the dividend distribution

avoids payroll taxes and unemployment taxes under S corporations.