Upon hearing this, some people become confused and say, “Well, thats crazy does that mean that I don pay taxes on S corporation profits?
The answer to this related question is “no.” Because what you, a shareholder, pay taxes on is your proportionate share of the S corporation’s profits. For example, if you and a buddy equally own an S corporation and the S corporation makes $250,000, you will each need to pay the income taxes on your $125,000 shares of the S corporation’s profits. Note that it won’t matter whether or not this money is retained by the corporation. Even if the corporation keeps the profits, you will still be taxed on the profits. Okay, so what I’ve described in the preceding paragraphs is the general rule. But let me note that two common exceptions exist to the general rule: Exception #1: If an S corporation used to be a regular C corporation and the corporation retained some of its profits from the “C corporation” years and the corporation while an S corporation pays some of those old C corporation profits out to shareholders, that payment is a dividend. And that dividend (because it’s paid of the C corp
