How Much is Dividend Tax in 2024: A Small Business Guide

If you’re a small business owner paying yourself through dividends, you’ve probably wondered how much is dividend tax impacting your finances. 

Since dividends come from your business’ profits, they count as taxable income. With that in mind, knowing dividend tax rates can help you better plan for the future of your business. Let’s break down the dividend tax rates for 2024.

What are dividend taxes?

Dividend income falls into two categories: qualified and nonqualified. Each has its own tax rate. Your filing status also plays a role in determining how much you’ll pay. Qualified dividends benefit from lower tax rates, so clarifying whether your business dividends are qualified helps you ensure you are handling your taxes efficiently.

What is a qualified dividend?

Getting a handle on what makes a dividend "qualified" can save you a lot in taxes. The IRS has specific criteria for this, and meeting them means you pay less. That’s why qualified dividend income can help ease your taxes. 

A qualified dividend is a type of dividend that meets specific criteria set by the IRS, allowing it to be taxed at the lower capital gains tax rates rather than the higher ordinary income tax rates. To qualify, the dividend must come from a U.S. corporation or a qualified foreign corporation.

Additionally, there is a qualified dividend holding period required by the IRS.To receive the favorable tax treatment, you must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the cutoff date established by your business to determine which shareholders are eligible to receive the dividend.

What is a nonqualified dividend?

So what is the difference between ordinary and qualified dividends? A nonqualified dividend is a type of dividend that does not meet the IRS criteria for qualified dividends. As a result, nonqualified dividends get taxed at your ordinary income tax rates, which can be higher than the rates for qualified dividends. 

Nonqualified dividends typically come from sources that do not meet the holding period or other requirements set by the IRS for favorable tax treatment.

How much is dividend tax in 2024?

According to the IRS, the qualified dividend tax rate for the 2024 tax year involves paying 0%, 15%, or 20% on qualified dividends, depending on your taxable income. How much dividend is tax free also depends on income. For single filers, the 0% rate applies to income up to $47,025, 15% applies to income between $47,026 and $518,900, and 20% applies to income above $518,900. 

For married couples filing jointly, the 0% rate applies to income up to $94,050, 15% applies to income between $94,051 and $583,750, and 20% applies to income above $583,750.

Nonqualified dividends, on the other hand, get taxed at your ordinary income tax rates. This dividend tax rate ranges from 10% to 37% in 2024. This means if you fall into a higher tax bracket, you’ll pay more on nonqualified dividends compared to qualified ones.

Your filing status—single, married filing jointly, head of household—affects which tax bracket you fall into. For example, if you’re single and your taxable income is $50,000, you’ll pay 15% on qualified dividends. But if you’re married filing jointly with the same income, you’ll still pay 0% on qualified dividends.

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How to report dividend income on your tax return.

When tax season rolls around, you need to know how to report your dividend income correctly. As a small business owner, you’re probably familiar with the payroll forms you need to know for tax filing. Well, The IRS requires you to use specific forms to ensure accurate reporting on dividends too.

First, you’ll receive Form 1099-DIV from each financial institution where you earned dividends, so account for this for your own business. This form details the total dividends you received, separating them into qualified and nonqualified categories. Keep these forms handy, as you’ll need them when filling out your tax return.

Next, you’ll report this information on your Form 1040. On Line 3a, enter the total amount of qualified dividends. These dividends benefit from lower tax rates, so it’s important to report them separately. On Line 3b, enter the total amount of ordinary dividends, which include both qualified and nonqualified dividends. This ensures the IRS can apply the correct tax rates to each type.

For nonqualified dividends, you’ll pay tax at your ordinary income tax rate. These dividends get lumped into your total taxable income, which could push you into a higher tax bracket. Make sure you accurately report these amounts to avoid any issues with the IRS.

If you have dividends from multiple sources, add them all together before entering the totals on your Form 1040. Double-check your calculations to ensure accuracy. Misreporting dividend income can lead to penalties or additional taxes owed.

Simplify your payroll taxes. 

Understanding the dividend tax rate can help you make informed decisions about how to compensate yourself as a small business owner. Homebase payroll simplifies your pay process so that your team is accurately and quickly paid, and you can trust the financial shape that your business is in after all the pay periods are done. Get started with Homebase today and make managing your team a breeze.