Sunday, October 10, 2004

How Corporations Are Taxed - Dividends Are Taxed Twice And Owners Pay Tax On Salaries And Bonuses

How Corporations Are Taxed - Nolo: "How Corporations Are Taxed"

Corporate Tax Payments
The corporation must file a corporate tax return, IRS Form 1120, and pay taxes at a corporate income tax rate on any profits. If a corporation will owe taxes, it must estimate the amount of tax due for the year and make payments to the IRS on a quarterly basis -- in April, June, September and January.

Shareholder Tax Payments
The corporation's owners, if they work for the corporation, pay individual income taxes on their salaries and bonuses, like regular employees of any company. Salaries and bonuses are deductible business expenses, so the corporation deducts those costs and does not pay taxes on them.

Tax on Dividends
If a corporation distributes dividends to the owners (rare for small corporations where the owners work for the corporation), the owners must report and pay personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are not tax-deductible, the corporation must also pay taxes on them. This means that dividends are taxed twice -- once to the corporation and again to the shareholders.