The Complete Breakdown of Double Taxation from a C-Corp (Paying Yourself a Salary)
In this episode of Coffee with Carl, attorney Carl Zoellner guides you through the process of paying yourself.
Alright investors, we’re going there.
Double taxation within a corporation
Let’s get to the nitty-gritty of it all.
First and foremost, I can’t give you the “one-works-every-time” rule for investors, it’s going to depend on what you’re doing, and on which entity we would suggest.
Usually, when someone talks about double taxation and C corporation, it’s because the C corporation currently pays a flat tax of 21% on any income. And then if you pay yourself a salary or dividend, they’re considering the second payment taxable too.
When you look at paying yourself a salary, it’s where it comes out as a wash, because when you pay yourself a salary, your corporation is taking a deduction for paying that salary. But yes, you are paying your personal tax rate plus your self-employment tax, so you’re splitting with your corporation on that income.
Actually, the most pure form of double taxation in a C corporation is your dividend payment. Dividends are taxed at long-term capital gains rates, so that’s beneficial from a tax perspective, but they’re not deductible to the corporation. If the corporation has taxable income, it’s paying at 21%, and if it’s paying you a dividend as a shareholder or owner, then you’re then paying tax at long-term capital gains rates.
Even in that scenario, in most cases you’re really not looking at anything over 36%, which for a lot of you say in California or states with high income tax, that’s still usually probably lower than your effective rate in a lot of places. So just as an FYI on that one, it’s not quite the monster in a closet we’ve all been taught it is.
The other thing, in a C corporation it’s voluntary so I don’t have to pay myself a dividend payment. I don’t have to pay myself a salary. Most business owners out there, if you do a little bit of tax planning, a lot of the money that’s going to come out of that corporation to you, you can take out as a reimbursem*nt, which comes out at 0% tax.
Really what it comes down to is if you’re paying tax at multiple levels in a corporation, a lot of times, it’s because you’re not doing the requisite tax planning to avoid it. Like I said, I just want to talk about that a little bit. Is it possible to have two levels of tax within a C corporation? It is, but there’s some real benefits in a C corporation that either don’t work the same as in an S corporation, or just aren’t available.
How about medical care reimbursem*nts? Another great tool that a C corporation can do differently than an S, because an S is a flow through, and a C corporation is not, so a C corporation could reimburse those expenses as part of a medical reimbursem*nt plan.
Another thing is for high W2 income earners out there. With a C corporation, you’re not required to pay yourself a reasonable salary. In an S corporation, you are. So you can run into a scenario that if your corporation is making a significant amount of money, if you’re already a high W2 income earner, you may not be able in an S-corporation to turn that spigot or faucet off of pouring onto your W2. In a C corporation, you can.
The Takeaway
There’s some specific “in general” reasons to put folks into a C corporation, or have you utilizing a C corporation within your structure, but I did want to talk a little bit about the double taxation thing, because it is one of those topics that pops up quite a bit.
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