Misunderstandings About Salary vs. Dividends May Lead To More Small Business Audits
By Joseph M. Donegan on September 26, 2012
Business owners whose companies are structured as S-Corporations earn several tax benefits from this label. Most notable of these benefits is that businesses are classified by the Internal Revenue Service as a flow-through entity, in which corporate income, losses, and deductions are reported on individual tax returns and assessed at individual income tax rates.
While this allows S-Corporations to avoid double taxation on corporate income, the structure may also leave more small companies open to scrutiny from the IRS if they fail to understand or abide by federal tax law relating to dividends and salaries. Owners who work for their company in an employment capacity have the option of taking profits from the business and allocating them in two ways.
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