Why might a shareholder who is also an employee prefer receiving a dividend instead of compensation from a corporation?
An individual shareholder might prefer a dividend to compensation because, although the dividend is subject to double taxation, both corporate tax rate and the dividend rate can be substantially below the single tax on compensation.
For example, the corporate tax rate is 21 percent and the dividend is taxed at 20 percent (ignoring net investment income tax).
Whereas, compensation can be taxed at the relatively high ordinary tax rates (37 percent) plus the federal social security (FICA) taxes top individual rate now higher than the top corporate rateif the corporation pays dividends to the shareholders, those payments are subject to corporate-level income tax.
However, the individual does not have to pay
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