C corp dividend tax rate for solo owner - capital gains or ordinary income?

The good news is that dividends from your C corporation would typically be taxed at the qualified dividend rate (which is the same as the long-term capital gains rate), not your ordinary income rate - assuming certain conditions are met. For dividends to qualify for the lower rate, the corporation must be a U.S. corporation (or a qualifying foreign corporation), and you must have held the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Since you're the owner of your own C corp, this holding period requirement shouldn't be an issue. The qualified dividend rates are 0%, 15%, or 20% depending on your income bracket. At a 32% marginal rate, you'd likely fall into the 15% or 20% dividend tax bracket. There's also the 3.8% Net Investment Income Tax that kicks in for higher incomes. One important caveat: the IRS watches closely for C corps that pay unreasonably low salaries to owner-employees while taking large dividends. Make sure your salary is reasonable for your industry and role, or you could face scrutiny.

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I was initially skeptical about taxr.ai when someone recommended it, but after getting conflicting advice from two different CPAs about my C-corp dividend taxation, I decided to give it a try. I'm actually shocked at how helpful it was! It turns out both my CPAs were partially right but missing crucial details. The service confirmed my dividends qualified for the preferential rate, but also flagged a potential reasonable compensation issue I hadn't considered. They provided actual case citations showing how the IRS has ruled in situations similar to mine. The documentation was detailed enough that I shared it with my regular accountant who now uses their analysis for my tax preparation. Seriously worth checking out if you're in this confusing C-corp dividend situation.

If you need to talk directly to the IRS about this (which honestly might be the best option with conflicting professional advice), I'd recommend using https://claimyr.com to get through to an agent quickly. I spent DAYS trying to reach someone at the IRS about a similar C-corp dividend question last year and kept getting disconnected or waiting for hours. With Claimyr, I got through to a business tax specialist at the IRS in about 20 minutes. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone tree for you and call you when they've got an agent on the line. The IRS agent I spoke with clarified exactly how my C-corp dividends should be reported and what documentation I needed to maintain.

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I needed clarification on some other C-corp issues. I honestly didn't expect much, but I was connected to the Business & Specialty Tax Line in about 30 minutes (versus the 2+ hours I spent last time I called directly). The IRS specialist I spoke with was surprisingly knowledgeable about qualified dividend requirements. She confirmed that as a C-corp owner, my dividends would indeed qualify for the preferential rate (15% in my case) rather than ordinary income rates, as long as I'm paying myself a reasonable salary. She even emailed me relevant sections from Publication 550 and an internal guidance memo specific to closely-held C corporations. This saved me at least $8,700 in taxes compared to what my accountant had initially calculated. I'm still somewhat in shock at how helpful this was.

Something nobody's mentioned yet - don't forget about the accumulated earnings tax if you're retaining too much profit in your C corp without a specific business purpose. The IRS can hit you with an additional 20% tax on retained earnings beyond $250,000 if they believe you're retaining profits just to avoid the dividend tax. I learned this the hard way after an audit. Make sure you have documented business reasons if you're accumulating significant cash reserves in the corporation.

Just thought I'd add a real-world data point. I'm a solo C-corp owner and had exactly this situation last year. Paid myself $185k in salary and took $75k in dividends. The dividends were indeed taxed at the qualified dividend rate (15% in my bracket) on my personal return. One tip: For reasonable compensation documentation, I keep a spreadsheet of comparable job listings in my industry with salary ranges, take screenshots of these listings throughout the year, and document my hours and responsibilities monthly. My accountant says this is strong backup in case of questions.

Connor, you're right to be confused with conflicting advice from two accountants! The correct answer is that your C-corp dividends should qualify for the preferential qualified dividend tax rate (0%, 15%, or 20% depending on your income level), not your ordinary income rate of 32%. However, there's a critical requirement: you must be paying yourself a "reasonable salary" as the sole employee. The IRS scrutinizes owner-employees who pay artificially low salaries to minimize payroll taxes while taking large dividend distributions. Since you mentioned you're already paying yourself wages, you're likely on the right track, but make sure that salary is defensible based on industry standards for your role and location. At your 32% marginal bracket, you'd likely pay either 15% or 20% on qualified dividends (plus potentially the 3.8% Net Investment Income Tax if your income exceeds certain thresholds). This is a significant tax advantage over ordinary income treatment. For audit protection, document your salary determination process - keep industry salary surveys, job descriptions, and records of hours worked and responsibilities. Also ensure your corporation meets the basic requirements (U.S. corporation, proper holding period, etc.) for qualified dividend treatment. The accountant who said "capital gains rate" was essentially correct - qualified dividends are taxed at the same rates as long-term capital gains, not ordinary income rates.