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Ask HN: Pay myself dividends instead of salary?

5 points by rajacombinator ↗ HN
I'm the sole shareholder of a DE C Corp and I'm currently paying myself a subsistence salary from the company coffers. Someone suggested to me that I ought to pay myself in dividends rather than salary in order to reduce my payroll tax burden. (The budget is tight enough to warrant this.) What steps do I need to take to do this? I'm guessing it involves more than ACHing the amount directly to myself, maybe need to file some document? Would welcome any suggested reading.

8 comments

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mkobar
C Corp dividends are double taxed (once for the Company and once for the individual). This is a good strategy for Sub Chapter S Corps, but not C Corps.

Google Double taxation for more info.

Disclaimer - I am not a CPA or even play one on TV.

dragonwriter
Depending on how little of a "subsistence salary" we are talking about (and how little other taxable income the owner has) the increase in income tax may be less than the savings in payroll tax involved in moving from salary to dividends.
27182818284
The payroll tax burden as a founder of my first DE C Corp was more than I had expected, but not abnormal in the sense of the US. If I could do it over, I would handle it differently and talk to a CPA upfront (rather than later like I did) before doing it, so that the burden was less.
tptacek
(a) I don't think this trick helps you much if you're in a C corp; this is usually done in S corps.

(b) You are required to pay yourself a "reasonable" salary, and the IRS gets to determine what "reasonable" means for your profession.

(c) You probably aren't going to save that much money.

(d) As I understand it, the ratio of dividend income to salary income is a potential audit flag.

Talk to your accountant. (If you're a sole proprietor or have complete control over your compensation, it may have been a mistake to set up a C-corp to begin with).

As for how you pay yourself a dividend: you simply write yourself a check, the same way you'd cut a distro in an LLC.

logn
I've researched this topic myself and find the advice above accurate.

> (The budget is tight enough to warrant this.)

If your budget is tight then maybe you qualify for more tax breaks and incentive programs than you realize. Do a comparison between taking every deduction/credit possible and doing your dividends.

IANAL.

lauradhamilton
You can get into trouble with the IRS. Consult a professional.
rajacombinator
Thanks all for the suggestions. To elaborate, I was surprised as a first time incorporator to find that payroll taxes essentially doubled my tax burden. (On a salary in the 20-30k range.) Based on the advice in your replies it looks like this optimization is probably not worthwhile or at least not without consulting a professional.