Are dividends taxable to an individual?

[ZNICK]

I heard you don't pay taxes on dividends... is that true if from only certain entity types, or am I totally wrong?

HELP!

Z

[tedjr]

Howdy Z:

I believe you heard wrong. The only thing I know is that the interest from tax exempt bonds is not taxable. I do not know of any other tax free dividends for individuals or any form of ownership for that matter. I am not a CPA and hopefully one will add their opinion here too.

[John Hyre]

Dividends from a C-Corporation are taxable.  Distributions from most other entity types (e.g. -S-Corporation, LLC, etc.) are not generally taxable.

John Hyre

[Dave T]

John,

Would you please expand on your response.  

I have always understood that an S-Corp can declare a dividend.  Declaring a dividend is one way to reduce the self-employment income tax bite for the owner when a reasonable salary is paid.  The dividend distributed is not subject to self-employment income taxes, but is still reported as dividend income on Schedule B.  

Has my understanding been wrong all along?

[WilsonTaylor]

S-Corp profits flow through to the income of the individual stockholders.  The Corporation pays no taxes on them, the individual does.  They are reported on a schedule K-1 and are not subject to the self employment taxes.  Any money taken out of the corporation is in effect a draw against profits that have already had taxes paid by the individual, so are not taxable a second time.  The catch to this is that when you work for your S-Corp, you must take a salary that is "reasonable" for the work being done.  If you do not pay yourself enough. the IRS may step in and adjust your income to a more reasonable level and you will end up paying the self-employment taxes after all.

Wilson