Dividends and distributions
Submitted by Anonymous on Thu, 2008-07-31 13:55.
This site is incredibly helpful! I have a question: For my corp, after I pay mysel my salary, I will have $900 left each week. I assume that this is treated as a dividend. How do I handle this? Do I just let it grow quarterly in the company bank account and then give myself a check as a dividend at the end of the quarter and then pay taxes on the total dividends at the end of the year? I have read about some people saying not to do dividends but rather take all of their money in salary so that you do not have to pay taxes twice on the dividends. If anyonce can enlighten me on it, I would really appreciate it. Thank you.
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Net Income
No, the $900 left over each week is profit or net income.
What happens next depends if your corp is taxed as an S or C corp
C-Corp
The corporation is taxed on the annual taxable net income of the corporation. Any dividends that are paid to shareholders are taxed at 15% paid by the shareholders (assumes dividends are qualified). The corporation needs to make quarterly estimated tax payments.
S-Corp
The corporation's net taxable income pass to the shareholders' individual tax return and is taxed at their individual marginal tax rate. Any payments to the shareholders as return of capital, called distributions, are basically reimbursements of previously taxed income and are not taxable. Any distributions in excess of the shareholder's basis is taxable at capital gains rates. Note this is a pretty broad simplification. Any S-Corp that has always been an S-Corp will not have dividends, only distributions.
You might want to take a little distribution to cover your income tax liability on the S-Corp income.
If shareholder-officers do not receive a reasonable salary, the IRS can claim the distributions are disguised salary & reclassify the payments requiring the corp to pay back payroll taxes, interest & penalties. But it sounds like you're taking a salary so that shouldn't be an issue.
I hope this helps...
L:)