Can a C-Corp pay it's sole owner a dividend instead of a salary?

Forum|Forum|2 years ago
June 7, 2023
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Let's say in a hypothetical situation I am the sole shareholder of a C-Corporation. In year 1, let's say it makes $200,000. It pays me a salary of $60,000. The other $140,000 is profit and retained in the company. In year 2, it makes $0. My question is: can I just take $40,000 in dividends out? Or do I have to pay myself a reasonable salary first, out of the previous years profit, before I can pay dividends?

I'm just trying to come up with a way to alleviate the tax burden of a spike in income by spreading it out over multiple years. I would like to be able to just pay the dividends in year 2, since they have 0% additional tax (with a taxable income of around $44,000). Having to pay salary again would mean I pay payroll taxes and income taxes on it, on top of the 21% corporate tax rate I paid on it in year 1.

Not A Product Question

Anonymous_

Employee

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Critter-3

Be aware that the dividends paid out by the C-Corp is NOT deductible on the corp return so the corp pays taxes on the dividends AND the owner also pays taxes on the same dividends on their personal return.

Mike9241

@Critter-3 the taxpayer is contending he would pay no taxes on the dividends in the second year - they would probably be qualified dividends and thus taxed at 0% if his income is low enough.

@augh no one can say whether the IRS would agree the first-year salary of $40K is reasonable. the IRS has huge databases that it can look at that would fairly represent your corporation and see the range of salaries taken and their net income. The issue I see, if you can pay yourself a dividend, then you should be able to pay yourself a salary. However, no one can say if the IRS would even give your returns a second glance. Put another way the code does not define reasonable compensation. Rather numerous court decisions have addressed the issue with no consistent results (different tax courts). Your interest would best be served by consulting a tax pro.