did you know - dividends
Dear business owner,As a business owner, you may draw a substantial amount of cash out of your business. But, after paying taxes, you may feel like you are in partnership with Uncle Sam rather than in business for yourself.
Fortunately, there are ways to reduce the tax bite when taking cash out of your closely held business.
For example, if your business is regularly taxed "C" corporation, you have most likely avoided paying dividends to yourself. Dividends, unlike salary payments, are taxed at the corporate level - and, until recently, they were also taxed to you just like your salary. Hence, the notorious "double tax on dividends."
But you may not know that recent law change altered the tax treatment of dividends, making them a more viable option for small corporation owners. Dividends are still taxed to your corporation, but the tax you pay when reporting them on your personal return has been significantly reduced - in some cases, to as little as half the tax you would pay on an equivalent amount of salary. What's more, dividends, unlike salary, are not subject to federal payroll taxes. So, depending on your individual situation, you may want to rethink your compensation plans.
If you run your business as an "S" corporation (which is taxed like a partnership), different considerations come into play. You don't have to worry about a double tax on dividends because your company's profits are taxed directly to you. There is no corporate-level tax. So dividends and salaries receive the same basic income tax treatment. However, you can still avoid federal payroll taxes by minimizing your salary payments and maximizing dividend distributions. Of course, the IRS won't let you go overboard on this - but, here again, within reasonable limits, you may be able to achieve considerable tax savings by rethinking your compensation plan.
I would be happy to consult with you on this or any other compensation issues. Please call me at (951) 775-7944 to set up an appointment at your earliest convenience.
Sincerely,
Douglas A. Sevy