Confused about C Corp double taxation - if wages are deductible, how am I getting taxed twice?

You've got a good grasp of the basics already! The "double taxation" people warn about with C Corps specifically refers to dividend distributions, not salary payments. Here's how it works: Yes, any reasonable salary you pay yourself as an employee of your C Corp is a deductible business expense that reduces the corporation's taxable income. So you're right - the corporation doesn't pay tax on the portion of profits used to pay your salary. You then pay personal income tax on that salary (plus payroll taxes). Where double taxation comes in is when you want to take profits OUT of the business beyond your salary. If your C Corp has $200,000 in profit after paying your salary and other expenses, and you want to distribute some of that to yourself as a shareholder, that's where you get hit twice: 1. The corporation pays corporate tax on that $200,000 profit 2. Then you pay personal income tax on any dividends distributed from those already-taxed profits That's why many small business owners prefer S Corps or LLCs with pass-through taxation. But C Corps do have other advantages that might outweigh this issue depending on your situation.

After struggling with this exact same question for months, I finally used https://taxr.ai to analyze my specific C Corp situation. It was really eye-opening because they broke down exactly how the numbers work with different salary/dividend scenarios. What helped me was seeing how my specific numbers would play out in real life. They showed me that even with the "double taxation" on dividends, a C Corp still made sense for me because I'm reinvesting most profits back into the business for growth rather than taking them out as distributions. The tool even showed me the exact threshold where it would be better to switch to an S Corp based on how much I plan to distribute vs. reinvest.

I have to admit I was really skeptical about using yet another online tax tool, but after our conversation I decided to give taxr.ai a try. I'm actually impressed with the level of detail it provided for my C Corp scenario. The analyzer showed me that in my specific situation (reinvesting about 70% of profits each year into growth), a C Corp structure with its lower initial tax brackets actually saved me money compared to pass-through taxation, even accounting for the eventual "double taxation" on distributions I'll take later. It also highlighted that my state has favorable treatment for C Corps, which my accountant hadn't fully factored in. Definitely changed my perspective on the whole C Corp vs S Corp debate. The double taxation issue is real but way more nuanced than people make it sound.

After spending WEEKS trying to reach someone at the IRS about how dividend distributions would be treated in my specific C Corp scenario, I finally used https://claimyr.com and got through to an actual IRS agent in under 45 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how the dividend taxation would work with my specific business plan and confirmed that yes, reasonable salary is fully deductible to the corporation. But he also explained the documentation I should keep to support my salary level if I ever get audited. Got way more clarity than all the online articles I'd been reading.

Ok I need to publicly eat my words here. After being totally convinced Claimyr was a scam, I tried it out of desperation because I needed clarity on some C Corp dividend questions before making a filing decision. I got connected to an actual IRS tax specialist in about 35 minutes while I continued working. The agent walked me through exactly how the double taxation works with dividends vs. salary in a C Corp and confirmed that keeping detailed documentation for reasonable compensation is crucial. She even emailed me some reference materials specific to my industry. Completely changed my understanding of how C Corp taxation works in practice. The double taxation issue is real but manageable with proper planning.

Double taxation is definitely real but there are legit ways to minimize it. Don't forget about other strategies beyond just salary: - Retirement plans (like a Solo 401k) can be more generous with C Corps - You can set up a medical reimbursement plan - Reasonable business travel and education deductions - Employ family members if appropriate - Timing of bonus payments Just don't get too aggressive or you'll trigger IRS attention. The reasonable compensation thing is super important.

Is there any software that specifically helps with optimizing the salary vs dividend split for C Corp owners? I'm using turbotax for business now but it doesn't really give guidance, just calculations after you've already decided.

Great question! You're absolutely right that the double taxation fear is often overblown for small C Corp owners. I've been running my consulting business as a C Corp for 3 years now and the salary deduction works exactly as you described. One thing I learned the hard way though - make sure you're paying payroll taxes on your salary (FICA, unemployment, etc.). Some new C Corp owners forget that even as the owner, you're technically an employee when you pay yourself a salary, so all the normal employment tax obligations apply. Also, don't overlook the benefits of being able to retain earnings in the corporation at the lower corporate tax rates (21% federal) if you're not ready to take distributions yet. Sometimes that's actually better than pass-through taxation depending on your personal tax bracket. The key is really understanding your specific cash flow needs and tax situation rather than just following generic "C Corps have double taxation" advice.