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Corporate Dividend Tax

Corporate Dividend Tax. Corporate dividends are distributions of profit made by a “subchapter C” corporation to its shareholders. In addition to the profits already having been taxed when made by the corporation, it is taxed again when distributed to the shareholder as a dividend.

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Corporate Dividend Tax

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  1. Corporate Dividend Tax • Corporate dividends are distributions of profit made by a “subchapter C” corporation to its shareholders. • In addition to the profits already having been taxed when made by the corporation, it is taxed again when distributed to the shareholder as a dividend. • However, corporate dividends are taxed only at the capital gains rates if they are “qualified” dividends. • The rules regarding when a dividend is qualified are complex. The essence of the rule is that you must hold a stock for more than 60 days for the dividend to be qualified. • Non-qualified dividends are taxed as ordinary income. Federal Income Taxation Lecture 15

  2. Tax Withholdings • An employer is required by law to withhold estimated federal income tax from the employee and to send that money straight to the IRS. The amount withheld is reflected on the employees W-2 form. • The employee can minimize withholding by claiming additional “exemptions” which are based on anticipated deductions, such as children, large mortgage interest, etc. The employee claims the number of deductions on a Form W-4, which the employer uses to determine how much to withhold. • One generally need not withhold taxes from an independent contractor or other payee. However, the payer must send a Form 1099 reporting the income to the IRS and the payee. Federal Income Taxation Lecture 15

  3. Payroll Taxes • In addition to ordinary income tax, other special taxes must be paid on wages, including: • Social Security Tax • Split between employer and employee. An independent contractor must pay both sides! • Each “side” currently pays 6.2% of income up to about $100,000 • Medicare Tax. • Same split rules as with the social security tax • Each “side” currently pays 1.45% of income with no upper limit • Unemployment Taxes Federal Income Taxation Lecture 15

  4. Partnership Income Tax Returns • Partnerships (general or limited) do not actually pay their own taxes. Instead, the partners pay the tax (or deduct the losses as business losses) at their own income tax rates as their own income. • Still, the partnership must file its own return (Form 1065) to tell the IRS how much money it made that year, who the partners are, how much income is allocable to each partner, etc. • Schedule K allocates income (or loss) to each partner in proportion to his or her ownership interests. • The Partnership then sends “K-1” forms to the IRS and to each partner indicating the gain or loss that must be reported on the partner’s private return. Federal Income Taxation Lecture 15

  5. Taxation of a Limited Liability Company • A limited liability company (LLC) has “pass through” taxation like a partnership and limited liability like a corporation. • If an LLC is a single member LLC, it may not even have to file its own return. The owner can simply use Schedule C (business income) to report the LLC’s income or loss. • If there are multiple members, the default rule is that an LLC is treated as a partnership. In such case, the LLC would use the Form 1065 like the partnership. • The LLC can elect to be treated as a corporation for income tax purposes. It does so by filing a Form 8832 Election. If it does so, it files with a Form 1120 like any other corporation. Federal Income Taxation Lecture 15

  6. Subchapter S Corporations • Any corporation that qualifies to be treated as an S corp can elect to do so by filing a Form 2553 with the IRS (and a similar form with the state). • An S corp files a Form 1120S as its income tax return. • The corporate profits are taxed to the individual shareholders. Although, some types of income are taxed to the corporation. • The corporate profits can be distributed or held, but either way, they’re taxed to the shareholders as income. • Profits that are given as dividends are not subject to payroll tax. • But, be careful, the IRS may force a taxpayer to include S corp dividends as salary for payroll tax purposes if it feels that someone is using the S corp to avoid payroll tax. Penalties may also apply in this type of case. Federal Income Taxation Lecture 15

  7. Subchapter C Corporations • Corporations file Form 1120 - and there are many special Forms 1120 for various types of corporations • E.g., there are special Forms 1120 for public organizations, life insurance companies, real estate management, etc. • Corporations are eligible for a different (and often more expansive) set of deductions than individuals. Corporations can take deductions for certain types of dividends given to shareholders. • A lot of information about the corporation, its officers’ salaries, its finances, etc., must be included on the corporate tax return. Federal Income Taxation Lecture 15

  8. Corporate Tax Rate Federal Income Taxation Lecture 15

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