March 12, 2020

2020 – 03/09 – Determine a reasonable salary for a corporate business owner

If you’re a C corporation owner, you probably know there’s a tax advantage to taking money out as compensation rather than as dividends. The reason: A corporation can deduct executive salaries and bonuses, but not dividend payments. So funds withdrawn as dividends are taxed twice, once to the corporation and once to the recipient. Compensation is taxed only once to the employee who receives it. However, there’s a limit on how much money you can take out as compensation. Compensation can be deducted only to the extent that it’s reasonable. Any unreasonable amount isn’t deductible and, if paid to a shareholder, may be taxed as a dividend.