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reasons why she should claim more or less withholding exemptions than the number of personal and dependency exemptions she will be claiming on her tax return. She will need to project her income and tax liability for the year in order to determine the appropriate amount of withholding tax to be withheld and the corresponding number of withholding exemptions to claim.3.Are taxpayers’ entire wages subject to the FICA tax? Explain.4.Nicole and Braxton are each 50 percent shareholders of NB Corporation. Nicole is also an employee of the corporation. NB is a calendar-year tax-payer and uses the accrual method of accounting. The corporation pays its employees monthly on the first day of the month after the salary is earned by the employees. What issues must NB consider with respect to the deductibility of the wages it pays to Nicole if Nicole is Braxton’s sister? What issues arise if Nicole and Braxton are unrelated?If Nicole and Braxton are sister and brother, according to §267(b) of the Internal Revenue Code Nicole and NB Corporation are considered to be “related parties.” Nicole is treated as owning her 50 percent and her brother’s 50 percent for a total of 100 percent ownership. Because NB and Nicole are related, NB is not allowed to deduct the 12-2
Topic 11 - Compensationsalary expense it accrued for book purposes on the salary it owes to Nicole until the year in which Nicole recognizes income. This does not cause any issues until the last paycheck of the year. For book purposes, NB accrues and deducts Nicole’s December salary but for tax purposes, NB is not able to deduct the salary until January 1 when Nicole receives her check.If Nicole and Braxton are unrelated, Nicole would own 50 percent of NB, and she would not be considered a related party to NB because she does not own more than 50 percent of NB. NB is allowed to deduct the compensation earned by Nicole in December of the prior year as long as it pays the compensation within 2 ½ months of year end (by March 15). In this case, NB pays the compensation at the beginning of January, so it would be allowed to deduct the compensation expense it accrued in December for Nicole.