Definition

• Corporate profits paid to shareholders are known as dividends. Some business owners opt for a corporate designation, usually an S class designation, so that they can supplement (or substitute) their wages for shareholder distributions. Shareholder distributions are not taxed as heavily as wages and so this arrangement lowers the recipient's overall tax burden. Additionally, many mutual funds invest in shares of these stocks and include them in the portfolios of their clients.
  
  

Types

• Dividends are defined as distributions of stock, money or property paid to an individual by a company or mutual fund. Dividends are divided into two categories; qualified dividends and ordinary dividends. Ordinary dividends are taxed at the normal income tax rate, while qualified dividends qualify to be taxed at the rate of net capital gains. A stock option is the option to buy or sell a stock as payment for your services.
  
  

Taxation

• If you receive in excess of $10 in dividend payments, you should receive a form 1099-DIV from the Internal Revenue Service. You are taxed on the gain from your corporate distribution, and the gain is defined as any value above the stock's basis. The basis of the stock is the cost plus any associated fees or transaction costs. To the extent that the value of the stock is more than the basis, it is treated as dividend income. However, a corporation's distribution of its own stock or stock rights, also known as stock options, are generally tax free to shareholders until they are exercised, meaning these stocks don't have any tax implications until you decide to sell them and a profit.
  
  

Reporting

• Ordinary dividends are taxed as ordinary income and qualified dividends are taxed at a qualified rate. Report both earnings from stock on line 1 of Part I or line 8 of Part II on IRS Schedule D. You are required to report these transactions even if you did not receive a 1099 in the mail. Long-term dividends are those from investments held for a year or more, while short-term dividends are those from investments held for less than a year.