Loretta Is the Sole Shareholder of Country Collectibles, a Calendar

question 39

Multiple Choice

Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization?

• A) No payroll taxes will be owed as a result of the audit.
• B) Loretta and Country Collectibles will each be liable for unpaid payroll taxes as a result of the audit.
• C) Only Loretta will be liable for unpaid payroll taxes as a result of the audit.
• D) Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit.

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Definitions:

Variable Cost

A cost that varies with the level of output or production volume.

Fixed Costs

Costs that do not change with the level of production or sales, such as rent, salaries, and insurance.

Depreciation

The allocation of the cost of an asset over its useful life, reflecting the reduction in value owing to wear and tear, age, or obsolescence.

Sensitivity Analysis

The study of how the variation in the output of a model can be apportioned, qualitatively or quantitatively, to different sources of variation in the input of a model.