Quick Answer: According to the IRS, dividend income is taxed at preferential capital gains rates (0%, 15%, or 20%) for qualified dividends, or at your ordinary income tax rate (up to 37%) for non-qualified dividends. This distinction determines whether you keep significantly more of your dividend income each year.
What's the Difference Between Qualified and Non-Qualified Dividends?
Stop worrying about surprise tax bills: the type of dividend you receive determines whether you pay 0%, 15%, 20%, or up to 37% in federal taxes.
Qualified dividends receive preferential tax treatment at 0%, 15%, or 20% based on your income. According to IRS Publication 550, to qualify, you must hold the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. The dividend must also come from a U.S. corporation or a qualified foreign corporation.
Non-qualified (ordinary) dividends are taxed at your ordinary income tax rate, which can reach 37% for high earners. These include dividends from most REITs (Real Estate Investment Trusts), stocks you held for less than the required 60 days, and other non-qualifying distributions.
Here's what this means in real dollars: Say you're a café owner in the 24% tax bracket who receives $10,000 in dividends. If those dividends are qualified, you pay just $1,500 in federal tax (15% rate). If they're non-qualified, you pay $2,400 (24% rate). That's $900 saved by meeting the holding period.
Reinvested dividends are taxable even though you never received cash. You owe tax on the full amount in the year received. The good news? Reinvested dividends increase your cost basis, reducing capital gains when you eventually sell.
Your brokerage sends you Form 1099-DIV by late January showing total ordinary dividends (Box 1a, report on Form 1040 Line 3b) and qualified dividends (Box 1b, report on Line 3a).
Does Your Business Structure Affect Dividend Taxation?
Take control of your tax strategy: distributions from your own business work differently than investment dividends.
If you own stock in companies like Apple or Coca-Cola, those are true dividends. They're always taxable, though they may qualify for preferential rates if you meet holding requirements. These are separate from your business income.
If you run your restaurant or salon as an S-Corp, distributions to yourself are generally NOT taxable dividends. They're returns of income you already paid tax on when it flowed through to your personal return. However, you must pay yourself and any hourly team members reasonable W-2 salaries first. According to IRS guidance on S-Corporation basis, the IRS audits S-Corp owners who try to avoid payroll taxes by taking only distributions.
C-Corporation dividends face double taxation: the corporation pays tax at the 21% corporate rate, then shareholders pay tax again when profits are distributed as dividends. This is why most small businesses avoid the C-Corp structure.
How Do You Report Dividends on Your Tax Return?
If you've received a 1099-DIV in the mail and aren't sure what to do with it, you're not alone. Here's how to report everything correctly.
Your brokerage sends Form 1099-DIV by late January each year. This form shows all dividend income you received, separated into qualified and non-qualified categories. You report these amounts on your Form 1040: ordinary dividends go on Line 3b, qualified dividends on Line 3a.
If you receive $1,500 or more in total dividends, you'll need to complete Schedule B listing each payer. The form is straightforward: list the payer name, amount received, and total everything up.
Understanding dividend taxation helps you separate investment income from business compensation decisions—and make smarter choices about both.
How Does Homebase Help with Managing Business Finances?
Running an S-Corp means balancing owner distributions with the required W-2 salary. Homebase payroll handles your required salary payments, tax withholdings, and compliance filings automatically. Focus on making smart distribution decisions based on your overall tax strategy instead of administrative tasks during tax season.
For comprehensive guidance on managing business taxes and compensation strategies, explore Homebase's small business tax resources or learn how to pay yourself as a business owner.
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Sources and Methodology
At Homebase, we rely on up-to-date, authoritative sources to ensure every Question Center article provides accurate guidance for small business owners. We start with primary federal materials from the IRS and Department of Labor, verify details using official agency publications, and use reputable industry resources only to supplement—never replace—official law.
For this piece, we referenced IRS Topic No. 404 on dividends, IRS Publication 550 on investment income and expenses, Form 1099-DIV instructions, Form 1040 instructions for 2024, and IRS guidance on S-Corporation stock and debt basis.