Personal Tax

Who pay personal tax? Is personal tax deductible?

The owners of small corporations who work for their corporations, like all other employees, pay individual personal tax on salaries and bonuses they receive from the business. The corporation can deduct these employee compensation payouts, so they are taxed just once, at the individual personal tax level. Some forms of employee fringe benefits paid to the owner-employees are tax deductible by the corporation and are not taxable to the employee, so no tax is paid.

How are profits paid directly to the owners of a corporation in the form of dividends taxed?

Like employee compensation payouts, the payouts of corporate profits directly to the owners of a corporation in the form of dividends are taxed to the owner-employee.

Are dividends paid to owners of a corporation tax deductible?

No, dividends are not deductible by the corporation.

How to best distribute profits to the owners of a corporation?

Since dividends paid to the owners of corporations are not tax deductible, owners of small corporations normally do not declare and pay dividends. Instead, to avoid the double tax, they pay out profits to the shareholders who work for the corporation as:

• salaries,
• bonuses, or
• employee fringe benefits.