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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