We have an S-Corp which owns real estate. I understand that a dividend check can be written to the shareholders but the tax rate is less than that if the check was for a salary. I am some what of a slow learner, so could someone please explain this concept in simple terms? Thanks,
dlb
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S-corp doesn’t pay dividends.
100% of the income is taxed on your 1040 plus Self employment tax. After that, you can receive distributions from income with no further tax impact.
Things can change somewhat if the S-corp makes enough to pay you a reasonable salary.
To clarify, the “dividends” paid by an S corporation usually aren’t really dividends, but rather distributions of a shareholder’s distributive share of the profits. Accordingly, those S corporation dividends (er, really distributions) are taxed at ordinary income rates. The money isn’t taxed like a qualified dividend.
BTW, what makes a qualified dividend taxable at 15% is fact that corporation has already paid tax on the profit from which the dividend comes.
An s corporation does save you self-employment taxes as compared to a sole proprietorship or as compared to a partnership engaged in an active trade or business.
S-Corp only avoids the SE if the S-corp income is passive (rental income or the shareholder is not actively involved) or the shareholder receives payroll compensation (in the case where the shareholder is active)