Reporting C Corporation Dividends to Shareholders

When C corporations pay dividends to shareholders, the transactions get reported to both the shareholder and the Internal Revenue Service using Form 1099-DIV. This form gives the amount of the dividend as well as the classification of the dividend, which is important for determining how it will be taxed. Here’s what you need to know about reporting C corporation dividends to shareholders.

A financial advisor could help you optimize an investment strategy to minimize your tax liability.

Dividend Reporting Basics

Dividends paid by C corporations can represent an important source of income for individual investors. C corporations have to pay income taxes on their earnings and profits before paying dividends and the dividends paid to shareholders are not deductible as expenses on C corporation tax returns. That means dividends are subject to double taxation, as the shareholders also report and pay taxes on the dividends they receive.

A shareholder who gets at least $10 in dividends will receive a copy of Form 1099-DIV from the C corporation that pays the dividend. If an investor owns shares in more than one C corporation that pays dividends, they will get a different 1099-DIV from each one that paid more than $10 in dividends from that corporation. For those who hold their shares in a brokerage account, they may receive a consolidated form instead that shows all dividends paid.

Copies of this form, which reports the dividends paid during the previous calendar year as well as their classification for tax purposes, will also go to the IRS as well as state and local income tax authorities. The taxpayer who receives the 1099-DIV doesn’t need to send the form in with their tax return. Instead, the taxpayer uses the information on the form to fill out the tax return.

If the corporation that pays the dividend doesn’t send a 1099-DIV, the taxpayer is still required to report the dividend income for tax purposes. This includes dividends that do not meet the $10 threshold for sending a 1099-DIV. If a taxpayer is expecting a 1099-DIV from a corporation and doesn’t receive it soon after the January 31 deadline for sending it, it is appropriate to contact the corporation and request a copy.

Dividend Reporting Details

The Form 1099-DIV will report dividends as being one of several different types. The most common type is ordinary dividends. These are shown in Box 1a on the form. Ordinary dividends are usually taxed as ordinary income at the taxpayer’s usual rate.

Other types of dividends reported on a 1099-DIV include qualified dividends, which are in Box 1b. Qualified dividends generally get taxed at the capital gains rate of 0% to 20%, which is typically lower than the rate the taxpayer pays on ordinary income.

Some additional types of income beyond C corporation dividends are also reported on the 1099-DIV. These include capital gains distributions from mutual funds and exchange-traded funds, dividends paid by Real Estate Investment Trusts (REITs) and tax-exempt dividends.

Taxpayers report dividend income on Form 1040 of their tax return. Ordinary dividend income goes on Line 3b of the Form 1040. Qualified dividends get entered on Line 3a of the same form.

If a taxpayer receives more than $1,500 of ordinary dividends, the taxpayer also is required to complete Schedule B of the Form 1040 and attach it to their return. On the Schedule B, the taxpayer lists the name of the payer of the dividend as well as the amount of ordinary dividends.

To figure the tax on this income, taxpayers usually use the Qualified Dividends and Capital Gain Tax Worksheet that is part of the Form 1040.

Sometimes owners of closely held C corporations may elect to receive larger salaries because salaries are deductible expenses on the C corporation’s return. This helps to reduce the double taxation effect. However, the salaries paid have to be reasonable, according to the IRS definition, or the taxing authority may reclassify some of the salary as a dividend, increasing the corporation’s taxable income.

What Happens When a C Corporation Pays a Non-Dividend Distribution?

Not every payment a shareholder receives from a C corporation is treated as dividend income. The tax treatment can change when a distribution exceeds the corporation’s current and accumulated earnings and profits.

A distribution generally counts as a dividend to the extent it is paid from earnings and profits. That portion is taxable to the shareholder and may be classified as an ordinary or qualified dividend depending on the applicable requirements.

Once the corporation has distributed more than its available earnings and profits, additional payments may be treated as a return of capital. Instead of creating immediate dividend income, a return of capital generally reduces the shareholder’s tax basis in the stock.

For example, assume a $20,000 basis and a $5,000 distribution treated entirely as a return of capital. The basis would fall to $15,000, which could affect the gain or loss calculated when the shares are sold.

A distribution can also exceed the shareholder’s remaining basis. Once basis reaches zero, additional amounts generally produce a capital gain rather than reducing basis further.

This makes the classification reported by the corporation important. Shareholders should track both distributions and stock basis so they can calculate the appropriate tax treatment when receiving payments and eventually disposing of their shares.

What to Check When You Receive Form 1099-DIV

Form 1099-DIV helps taxpayers who own dividend-paying stocks to report the income on their tax returns. Before filing, taxpayers should compare the form with their brokerage records to make sure the dividend amounts appear accurate.

The difference between ordinary and qualified dividends is particularly important. Qualified dividends may receive lower tax rates, while other dividends are generally taxed at ordinary income tax rates.

Holding period can affect whether a dividend receives qualified treatment. Buying a stock shortly before a dividend payment and selling it soon afterward may prevent the payment from qualifying for the lower rate.

Investors should also check for dividends from investments sold during the year. Selling a stock does not eliminate the need to report a dividend received while it was owned.

Investors with several brokerage accounts may receive multiple 1099-DIV forms. These should all be reviewed before completing a tax return so income from a smaller or less frequently used account is not overlooked.

Correcting an error before filing can prevent problems later. If the dividend amount or classification appears wrong, taxpayers should contact the brokerage or company that issued the form and ask whether a corrected 1099-DIV is needed.

Bottom Line

Cash, a calculator and a note with "dividends" written on it.

Dividends paid by C corporations will be reported to shareholders using Form 1099-DIV. The C corporation will also send a copy of the form listing dividends to the IRS and other income tax agencies. The recipient of the dividends is required to report these dividends using the information on the 1099-DIV. Dividends will be classified as ordinary or qualified, which may affect how they are reported on the taxpayer’s return and the amount of tax that will be due.

Tax Planning Tips for Investors

A financial advisor can help you optimize your investment plan to lower taxes. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s income tax calculator helps you figure out how much tax you are likely to owe based on your specific situation.