Reduce Taxes on S Corporation Dividends

Reduce Taxes on S Corporation Dividends

There's a trick to lowering your tax bill, but the IRS is watching S corporations closely.

By Peter Blank

April 11, 2007

My husband and I are the only shareholders of our S corporation. I have heard that we can pay ourselves dividends to reduce the tax imposed on a portion of the corporation's income.

Peter responds:

The trick is to pay yourself less salary and take more of the S corporation's profits as dividends. This way you avoid FICA and Medicare taxes on the dividends.

But be careful. IRS is currently auditing thousands of S firms whose owners took unreasonably low salaries (or no salaries) to maximize their payroll tax savings. Remember the old saying ... Pigs get fat, but hogs get slaughtered.

To learn more about the tax implications of owning a business, see the Kiplinger Taxopedia.

Source: Kiplinger.