What is a Dividend?
A dividend is an allocation of profits from a company to its shareholders.
In small businesses it usually works like this – a company has made a profit for the year and paid income tax on that profit at the company tax rate of the time (currently 28%). The shareholders have not yet had the use of this money.
When the shareholders decide they’d like to withdraw this money from the company a dividend needs to be declared. The tax paid by the company is also attached to the dividend so that the shareholders aren’t double taxed on this income. However companies are required to distribute these with 33% tax paid – so the extra 5% tax will be payable by the company at the time it declares the dividend to the shareholders. The shareholder will receive the net amount for their use.
In the shareholders tax return for the year – if they are not in the 33% tax bracket (over $70,000 income) then they will receive a tax refund for the difference between the 33% tax paid on the dividend and their personal tax rate (eg 30%, 17.5% or 10.5%). If the shareholder earns over $70,000 then no extra tax is payable on this dividend.
If you have any questions about dividends (or anything else) please ask us!