Compensation vs. Qualified Dividends for Shareholder-Employees After the TCJA

Kilpatrick, Bob G., and Dennis R. Lassila. (2018). Compensation vs. Qualified Dividends for Shareholder-Employees After the TCJA. The Journal of Taxation, Volume 129, No. 1, (July 2018) pp. 6-13.

9 Pages Posted: 3 Jun 2019

See all articles by Bob Kilpatrick PhD., CPA

Bob Kilpatrick PhD., CPA

Northern Arizona University

Dennis R. Lassila

Texas A&M University - Department of Accounting

Date Written: July 1, 2018

Abstract

One important question facing shareholder-employees of small, closely-held C corporations is how to pay themselves for working in and/or running their corporations. Traditionally, C corporation shareholder-employees have been advised to pay themselves compensation instead of dividends, because compensation is generally deductible by the corporation, whereas dividends are not. The payment of compensation has been viewed as one way to mitigate the double taxation of C corporation net income. The combined amount of individual and corporate income taxes and employment taxes if the payment is in the form of compensation was typically smaller than if the payment were made in the form of qualified dividends. Thus, there has been a tendency for corporations to pay compensation rather than dividends to shareholder-employees.

The Tax Cuts and Jobs Act of 2017 (TCJA) has changed all that beginning in 2018. The reduction in the marginal tax rate for C corporations to 21 percent (down from 35 percent), the reduction in individual tax rates, and the retention of special low tax rates on qualified dividends substantially reduce the combined amount of taxes on qualified dividends relative to that on the same amount of compensation. We found that the combined amount of taxes on qualified dividends is less than that on compensation in many instances, especially when the amount of the payment to the shareholder-employee is $150,000 or less. This finding is significant because most small business owners take a yearly salary of less than $100,000.

Keywords: qualified dividends, compensation

JEL Classification: K34

Suggested Citation

Kilpatrick PhD., CPA, Bob and Lassila, Dennis R., Compensation vs. Qualified Dividends for Shareholder-Employees After the TCJA (July 1, 2018). Kilpatrick, Bob G., and Dennis R. Lassila. (2018). Compensation vs. Qualified Dividends for Shareholder-Employees After the TCJA. The Journal of Taxation, Volume 129, No. 1, (July 2018) pp. 6-13.. Available at SSRN: https://ssrn.com/abstract=3371179

Bob Kilpatrick PhD., CPA

Northern Arizona University ( email )

PO Box 15066
Flagstaff, AZ 86011
United States

Dennis R. Lassila (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845- 4584 (Phone)

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