Refer to the facts in the preceding problem.

a. If the business is operated as a partnership, explain the payroll tax/self-employment tax implications for the entity, Thomas, and Angela. (No calculations are required.)

b. If the business is operated as an S corporation, explain the payroll tax/self-employment tax implications for the entity, Thomas, and Angela. (No calculations are required.)

c. Given your discussion, how might payroll tax/self-employment taxes influence Thomas and Angela’s choice of entity through which to operate their business?

Data from Prob. 9

Angela and Thomas are planning to start a new business. Thomas will invest cash in the business but not be involved in day-to-day operations. Angela plans to work full-time overseeing business operations.

The two currently project that the business will generate $200,000 of annual taxable income before consideration of any payments to Angela for her services. Both agree that Angela's services are worth $100,000.

Angela and Thomas plan to form a pass through entity but are unsure whether to choose a partnership or an S corporation. In either case, they will be equal owners of the entity. Given their other sources of income, both Thomas and Angela have a 37 percent marginal tax rate on ordinary income. (Ignore any payroll or self employment tax consequences.)