I heard you don’t pay taxes on dividends… is that true if from only certain entity types, or am I totally wrong?
HELP!
Z
Howdy Z:
I believe you heard wrong. The only thing I know is that the interest from tax exempt bonds is not taxable. I do not know of any other tax free dividends for individuals or any form of ownership for that matter. I am not a CPA and hopefully one will add their opinion here too.
Dividends from a C-Corporation are taxable. Distributions from most other entity types (e.g. -S-Corporation, LLC, etc.) are not generally taxable.
John Hyre
John,
Would you please expand on your response.
I have always understood that an S-Corp can declare a dividend. Declaring a dividend is one way to reduce the self-employment income tax bite for the owner when a reasonable salary is paid. The dividend distributed is not subject to self-employment income taxes, but is still reported as dividend income on Schedule B.
Has my understanding been wrong all along?
S-Corp profits flow through to the income of the individual stockholders. The Corporation pays no taxes on them, the individual does. They are reported on a schedule K-1 and are not subject to the self employment taxes. Any money taken out of the corporation is in effect a draw against profits that have already had taxes paid by the individual, so are not taxable a second time. The catch to this is that when you work for your S-Corp, you must take a salary that is “reasonable” for the work being done. If you do not pay yourself enough. the IRS may step in and adjust your income to a more reasonable level and you will end up paying the self-employment taxes after all.
Wilson