Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income?
43.9% Crocker and Company pays taxes of $187,000 ($550,000 × .34). Therefore $363,000 ($550,000 - $187,000) will be distributed to the shareholder as a dividend. The shareholder pays taxes of $54,450 ($363,000 × .15). The total taxes paid on Crocker and Company's pre-tax income are $241,450 ($187,000 + $54,450), and the overall tax rate will be 43.9 percent ($241,450/$550,000).